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What are the influence of decreasing tax?

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  • 1 十年前
    最愛解答

    Why Certain Tax Changes Can Affect the Economy

    In a market economy resources are allocated by the forces of supply and demand. Producers of goods and services expand production to the point where the cost of producing the last unit is covered by the price that can be obtained in the market.

    The quantity of inputs to the production process ?labor services and capital ?is also influenced by changes in market prices. All other things equal, a rise in wage rates, for example, will tend to attract new potential workers and expand the labor force. An increase in the rate of return on saving and investment will tend to elicit more saving and investment. Thus changes in prices can affect the quantity of inputs used in production. This is how the price system allocates resources in a market economy.

    What would be the economic impact of a tax reduction on the aggregate demand for goods and services? Standard Keynesian analysis would predict that a tax reduction would increase disposable income, leading to an increase in consumption spending, the precise amount depending on the marginal propensity to consume. The initial increase in autonomous consumption would be subject to an expenditure multiplier, leading to a significant increase (conceivably measured in the hundreds of billions of dollars) in the equilibrium level of money or nominal total output. Traditional Keynesian analysis suggests that such fiscal stimulus potentially could translate into significantly higher real output of goods and services as well.

    There are a number of problems with this analysis, however. First, the size of initial expenditure increase depends at least in part of the nature of the tax reduction. More important, there is the real possibility of some "crowding out" of private expenditure associated with some increase in interest rates associated with a reduction or elimination of the budget surplus - the previous positive amounts of government savings would disappear, leading the supply of loanable funds in the economy to fall. Thus, the "multiplier" might be partly illusionary.

    Most critically, the economy is already at what most persons would describe as effective full employment, with the reported unemployment reflecting normal frictional and structural forces that inevitably lead some persons to be out of work at any given point in time. With the economy operating essentially at full capacity, any stimulus to aggregate demand would likely largely be reflected in inflationary pressures. In any case, the modern historical experience suggests that lowering unemployment below its "natural rate" works, at best, only temporarily. Current unemployment is believed to be at or even below that natural rate. Thus the case for a tax cut is not good at the present if the goal is merely to provide stimulus to aggregate demand.

    Yet there are other compelling arguments that support tax reduction. It is a standard proposition in public finance that the imposition of taxes imposes welfare costs on the population. Taxes impose an "excess burden" or a "deadweight loss" on the economy. Economic activity is based on mutually agreeable exchange, and taxes tend to reduce the amount of that exchange, potentially lowering output and the satisfaction of consumers and producers.

    In addition, tax reduction will reduce the incentive for tax evasion from tax payer, so finally the government may end up with higher tax revenue.

    Source: www.house.gov/jec/fiscal/tax/reduce.pdf

  • Ming
    Lv 7
    1 十年前

    Since tax is mostly involved in the components of GDP (C+I+G+X-M), you can hardly say that decreasing tax may cause effect on the whole economy.

    Firstly, when tax is decreased, citizens will have more money for consumption and saving. According to the multiplier theory, increase in saving will create more income for other people. Moreover, rising in consumption will raise up in import goods and services. However, government may spend less because of decreasing tax.

    資料來源: Is it all right? Help yourself.
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