Tax Income Payers - Free Essay Example

TAX CUT POLICY ON PUBLIC DEBT Tax cut policy is reducing the rate of tax imposed by government. According to the economic theory, the immediate effect of tax cut is reducing real income that the government gets and increasing the real income of people whose tax rate was lowered. In the long run, there may be a reverse in effect on government income which depends on response of tax payers. Depending on the tax rate that was originally charged, a cut in tax provide corporations and individuals with incentives for investment which increase economic activity that even if the tax rate is low, the net tax revenue collected will be more. In general, macro-economic effects of tax cut are not predictable in the long run. This is because, they depend on the way tax payers make use of their additional income and how government adjusts when its income reduces. There are three idealized scenarios which are hypothesized. The first one is that, when government cuts expenditure, th e expenditure of tax payers increase and they spend more money on commodities that come from within the country. Macro economically, this combination is neutral but the free market economy advocates argue that economic welfare is improved, since people are more accurate than government by buying commodities they actually want. (Blundell, 1998). The other scenario is that, government maintains its expenditure and tax payers increase theirs and spend money on commodities from within the country, the combination brings about stimulus to the economy. Advocates of supply side economies argue that tax cut should lead to growth of the economy and bring about greater prosperity and if it is not managed well, it leads to inflation when government cuts tax and incurs debt in hope that tax cut economic stimulus is large enough to bring about long term increase in tax revenues and paying off the debt in future. If this fails to occur, government is left with severe budgetary crisis. When government maintain expenditure and incur debt, tax payers may save the income that increase or buy commodities from outside the country. This is not an inherently deflationaly condition but contributes to difficulties in balance of payment which have secondary deflationaly effects and results to government budgetary crisis which follows painful readjustments. In practice, a mixture of these effects may occur; the net effect of tax cut depends on balance between them and will be a function of overall state of national economy. (Faive, 1997). Impact of Tax Cut Policy on Public Debt Policy makers have argued that tax cuts which are financed by deficit do not benefit the economy so much. The recent tax cuts have not been of benefit to the economy as much as the economy would be benefited if it had matched by spending cuts. Tax cuts have added federal deficits and there is a burden which is imposed on future tax payers. Supply side tax cuts that reduce distortions in tax code spur economic growth and do not create large revenue loss. Any added debts that result from tax cut are compared against the gross domestic products to be generated. Supply side tax representing long term reforms of federal fiscal system are implemented regardless of current budget balance. By contrast, social policy tax cuts that do not simplify tax code and does not make it more efficient should be avoided and should be considered if they are matched with equal spending cuts. Numerous studies show that supply side tax cuts on the capital income benefit the economy. The taxation study committee presented results of macroeconomic simulation of personal and corporate income tax cut. It was found that, if cut in corporate tax rate was matched by spending, United States output was boosted twice as much in the long run as individual rate cut on the same magnitude of dollar. There are large positive growth effects if tax cut is offset by cutting the spending in order to avoid deficit f rom increasing. Since the year 2001, federal tax legislation has mixed social policy cuts and supply side. Supply side tax cut represents 55% of recent tax cut which included reduction in individual rates, capital gain and dividend tax cuts, liberalization of savings account and small business expensing. The 45% tax cut is on social policy including 10% bracket of income tax and education tax benefits. Fiscal policies support recovery but return to large deficits is our major concern. When budget projections show large fiscal deficits over the next decade, recent emphasis on tax cut, security outlays and economic recovery come at eventual cost of interest rate having an upward pressure and crowding out of private investments and erosion of growth in productivity. Evaporation of surpluses of fiscal policy make budget less prepared to cope with retirement and put massive pressure on Medicare systems and social security with no cushion provided by earlier surpluses, there is no m uch time to deal with problem of insolvency before deficits of the government and there is increase in debt unsustainably leading to urgent need for meaningful; reform. (Blundell, 1980). Tax cut has long run supply side benefit and help mitigate budgetary costs. Federal deficits and ratio of debt to gross domestic product that are projected are manageable and remain below peak levels recorded in 1980s and early 1990s. The tax system puts disproportionate burden on corporate personal income, if compared with tax system that is consumption based, labor market saving and participation is discouraged and hence, less efficient economically. Discussing the Difference between Public Debt In neoclassical growth model, government controls both monetary and fiscal instruments which control supply of savings and demand for capital. In the equilibrium model, there is no relationship between economys capital intensity and inflation rate as measured by capital labor ratio or real interes t rate. For these models, capital intensity is invariant to inflation rate if and only if indebtedness of government is insulated from inflation through compensatory action which is suitable either by central bank or government treasury. Conditions of neutralizing changes public debt and money are clarified. Capital intensity can not be engineered to every degree because available asset monetization by bank is finite and viability of money has an upper bound on the money rate of interest, through virtue of possibility of inflation, though we cannot drive money interest rate to zero. The government can choose capital, money interest or real money which is drawn fully for one of the models. Equilibrium theory of rate of inflation is constant with static models where level of price is homogeneous of degree one in the liquid and government has interest bearing obligation. Restrictive credit policy brings about recession in short run and has uneven effects in the long run of the ec onomy. Stabilization of prices should not depend on Federal Reserve policies but in order to stabilize prices, it relies on entire policy tools. Together with having the right tools and moral force of nation declaring the purpose of stable price level, there is need for improvement. (Kogan, 2003). Current Statistics on These Debts In February 2008, current budget of public sector had a surplus of $2.0 billion compare to surplus of 0.7 billion in February 2007. If we concentrate on one month isolation, we can get distorted picture because the movements are erratic. If we focus on financial year, we can get better overview. Between April 2007 and February 2008, public sector had a deficit of $ 5.7 billion and at same stage in 2006/2007 financial year, deficit was $3.0 billion. In general, there was deficit in public sector between 1991/1992 and 1997/1998 before getting surplus in 1998/1999. There has been deficit that has been recorded since 2002/2003. There was net borrowing of $2.9 billion in February 2008 which compares to 2.5 billion in February 2007. The budget forecast was $36.4 for 2007/2008 which is net borrowing. Public sector net debt as percentage of gross domestic product was 36.0% in February 2008 compared with 35.5% in February 2007. Debt peaked at 43.8% in 1997. There was a steady fall of debt ratio when there was improvement in public sector finances where it reached a low of 29.8% in February 2002 and it has risen since then. In end of March 2008, debt forecast was 37.1%. There was net debt of $516.4 billion by end of February which compared with $481.96 billion one year earlier. At the end of March 2008, net debt budget forecast was $534.5 billion. The total public debt of United States called nation debt is the amount of money us federal government owns for creditors who hold their debt instruments. Debt which is held by public is federal debt held by individual, corporations, states and foreign government but not intergovernmental debt obligations held by social security. The securities held by public include treasury bills, bonds, notes and state series securities. As at April 2008, total federal debt of United States was approximately $ 9.5 trillion, 79,000 dollars for each taxpayer in America. Of this amount, $5.3 trillion is debt held by public. If social security and unfunded Medicare are added, the figure rises to $59.1 trillion. In 2007, public debt was 36.8% gross domestic product ranking 65 worldwide. (Faive, 1997). REFERENCES Faive M. (1997). Tax cuts versus government revenue: Mackinac Center for Public Policy. Kogan R (2003): will tax cuts ultimately pay for themselves: Center on Budget and Policy Priorities. Blundell R. (1998): estimating labor supply responses using tax reforms: Econometrical.