Question

(10 points) Question 2 In general, tax increases are politically unpopular. Would you ever be likely to favor a tax increase? Under what circumstances, if any, might a tax increase be beneficial to the economy? Explain your reasoning clearly in a paragraph to get full points!

Answer 1

Tax cuts offer the potential to raise economic growth by improving incentives to work, save, and invest. But they also create income effects that reduce the need to engage in productive economic activity, and they may subsidize old capital, which provides windfall gains to asset holders that undermine incentives for new activity.

tax cuts as a stand-alone poicy will typically raise the federal budget deficit. The increase in the deficit will reduce national saving and raise interest rates, which will negatively affect investment. The net effect of the tax cuts on growth is thus theoretically uncertain and depends on both the structure of the tax cut itself and the timing and structure of its financing.

In addition, if they are not financed by spending cuts, tax cuts will lead to an increase in federal borrowing, which in turn, will further reduce long-term growth. tax cuts that are not financed by immediate spending cuts will have little positive impact on growth. On the other hand, tax rate cuts financed by immediate cuts in unproductive spending will raise output.

Effective tax cuts would stimulate  new consumer spending and/or new business investment in the short run; and it would do the least possible damage to long-term fiscal prospects and hence minimize any upward pressure on interest rates.

Businesses have a longer time horizon than politicians—they need to know what the tax rate will be five years from now, and they need confidence that the system will fund the infrastructure and services that cities and states require. Because otherwise, their cost of doing business goes up, and their odds of long-term success go down.

Once tax rates are low enough so that common people don’t think that the government will just confiscate the fruits of their labor, real people in the real world stop obsessing about taxes. Instead, most normal people work to satisfy their personal economic goals. They earn money to buy a their desired level of life style and economic security and they continue to work hard until they perceive that they have achieved their objective.

The problem in USA is not that corporations and investors don't have enough after-tax cash; it's that they're not productively spending or investing the cash they already have. And it's a problem greatly amplified by the dramatic rise of income and wealth inequality in recent decades. Over the past 40 years, after-tax corporate profits have doubled, from about 5 percent of GDP to about 10 percent today, while wages' share of GDP has fallen by about the same percentage.

History shows that higher taxes are compatible with economic growth and job creation. The Clinton-era tax rates and revenues enabled budget deficits to fall, increasing national saving and reducing the long-term costs of borrowing, and this may have enabled the private sector to increase investment in ways that improved growth. Similarly, the Congressional Budget Office finds that letting the Bush tax cuts expire on schedule would strengthen long-term economic growth, if policymakers use the revenue to reduce deficits.