Monday, October 24, 2011

Tax cut ----- A solution for a sluggish economy

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The Bush Administrations Tax cut plan is a hot debated issue in todays America. In my essay, I will first briefly list the content of this plan and then I will discuss its positive and negetive effects to the both in short-term and long-term economy situation.

The Bush Administrations Tax cut plan can be divided mainly in two sections according to its attempeted effects One is aimed at enhancing the average family or persons earning, thus increasing the consumer demand in the whole economy. The following tax cut proceeds are taken to acheieve this goal Replacing the current tax rates of 15, 8, 1, 6, and .6 percent with a simplified rate structure of 10, 15, 5, and percent; Doubling the child tax credit to $1,000 per child and applying the credit to the Alternative Minimum Tax (AMT);Reducing the marriage penalty by reinstating the 10 percent deduction for two-earner couples. Another part of the tax cut is aimed at increasing the investment in the recessing economy by following proceeds Eliminating the death tax;Expanding the charitable deduction to non-itemizers;and Making the Research and Experimentation (R&D) tax credit permanent.

Occording to the Principles of the Macroecomics, a societys standard of living is determined by the the productivity of the labors. Among all the several factors affect the productivity, we can change the amount of capital we have by saving more and investing more. The composition of a nations saving comes from two parts Public saving and private saving. Pubilc saving equals to the government income from taxes minus the government expenditure. When government expend less than its income, it is called a surplus and the remaining government saving contributes to the total nations saving and investment. On the other hand, if government expend more than its income, a deficit occurs and government needs to issue bonds in the open market to financing its budget. In such cirmestance, governments borrowing has a negetive effect on the amount of nations total saving and investment. It is called a crowding out effect the government is competing with the private investors for the limited money in the loanable funds. We know that the government has already been in a budget defict under the Bushs Administration. It is estimated that the inplement of such a big tax cut costs the government more than $400 billions and it means that the government will be in a more large budget deficit. This will reduce the domestic investment and highten the interest rate. Higher interest rate discourage firms to borrow and invest more money in new factories, new products and researchs. At the same time, families borrow less to buy new houses and goods. All of these will eventually harm the well-being of the whole economy and reduce the economys growing rate. And we can go further by considering the effect of runing a budget deficit in an open economy. The raised interest rate will keep the domestic investors from investing aboard and attract the foreign investors to buy more Amercian assets, thus reduces the countrys net foreign investment. This in turn reduces the supply of dollars to be exchanged to foreign currency and causes the dollar to appreciate, further pushing the trade balance toward deficit.

But it is too simple for us to arrive at a decision from above that the Bush Administrations Tax cut will inevitablly damage the long-term economy of the States. The real economy world is far more complex than that. In order to fully understand the effects of the tax cut policy, we need to take in account of the tax cuts positive effect on the other sides of the economy. In the first place, tax cut aimed at enhancing the average family and personnel income will instantly raises the consume and the savings. The increased demand in goods and services will energize the recessing economy. And the saving increase will also result in a raise in the investment. In the second place, tax cut benifit to the enterprise will promote more investment. All these will increase the aggregate demand in the economy. In the mordern economy, it is more and more relized that the prospect of the economy plays a determinal role in the short-term performance, and thus changes the furture economy performance greatly. Considering the current economy situation in the States, the job market have been failing constantly for several years. Peoples earning remaining stable or even declining. More bankrupty are reported in these years and the stock market is going downward. Although the Fed have reduced the interest rate for several times in order to prosper the investment. There is little positive sign for the economy situtation to have been seen. I think that Bush adimistrations tax cut action can have a considerale effect in boosting the sluggish economy, although it will result a large budget deficit. Once the economy goes back on the right path, the increasing GDP will sufficently provide the income for the budget deficit and the government will also easily borrow the money needed to cover the expense in the international money market without reducing the amount of money needed for the investment since foreign investor will invest more in a more prosperous economy.

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