Question

At the beginning of his mandate, President Trump proposed as a part of his economic program a public funded one trillion-dollar spending in infrastructure. This program hasn't been approved yet, but it is believed that could be negotiated during 2019. Also, during December of 2017, the US Congress approved the "Tax cuts and jobs act". Between many changes to the tax code, the main highlights of this law are a permanent cut to the top corporate tax rate from 38% to 21% and the increase of the standard deductions of the personal income tax from $6,330 to $12,000 for single taxpayers and from $12,700 to $24,000 for married couple taxpayers. What are the possible consequences on the main economic variables of these particular measures? Will we have a surplus of deficit in the government budget? What other areas might be affected? Explain.

Answer 1

Such tax cuts or reduction in taxes both for corporate income and personal income will cause aggregate demand to rise in the economy . Tax cuts means that taxpayers have more money to spend on goods and services or more disposable income . So their demand for consumption goods rises . Also permanent cut to the top corporate tax rate will cause more profits generated for the corporate and hence more investment in business . Thus investment demand also rises . This causes AD to rise in the economy . Spending in infrastructure , is a government spending which also adds up to rise in AD in the economy .

So flow of money increases in the economy causing price level and real GDP to increase . Thus inflationary gap is created in the economy . There will be a budget deficit for the government because along with tax cuts in 2017 there is increase in government spending on infrastructure in 2019 . So spending rises but income falls causing a deficit .

There will be rise in employment , rise in production and growth due to this excess aggregate demand and also better infrastructure provided .