How Can Tax Cuts Revive The Economy?

How can tax cuts help revive the economy?
Gary Smith
Content

Introduction…………………………………………………………………………...page2

Subtitle 1 ……………………………….………………….………………………… page2

Subtitle 2 ……………………………….………………….………………………… page3

Conclusion………………………………………………………………………....... page 3

References………………………………………………………………………....... page 4
How can tax cuts help revive the economy?

Introduction The purpose of this paper to provide reasons on how tax cuts can revive the economy in economical terms. This paper will examine past approach and the current state of the US economy in a recession with particular variables in place. Stimulating the economy when in a recession will increase productivity and consumer demands. These will the decrease the cyclical unemployment and increase spending by workers, businesses and the government.

As History Reminds Us
In the past tax cuts along with the increase in government spending has caused the government deficit and the national debt to grow. Tax cuts helps to promote business investment and expansion thru the possibly of encouraging job creation that results in increased consumer spending. During the Great Depression and WWII tax cuts were made and many bonds were sold, this was the governments’ way of stimulating the economy by way discretionary fiscal policy. We can see here that the government can control the taxes but not the tax revenues. During any recession, the government will participate in tax cuts for an economical stimulus. The expansionary fiscal policy involves government attempts to increase Aggregate demand. This involves increased government spending and /or lower taxes, representing an increase Aggregate Demand and lead to higher economic growth.
Both the discretionary fiscal policy and the expansionary fiscal policy can reflect a stimulus in the economy but are insufficient to help manage the government deficits. One reason that tax cuts may be effective is that it allows for consumer flexibility. Consumers can base spending on their disposable income. Many people may purchase more can use their tax cut for that purpose and for the people who want to save their tax cuts can put it in their savings or use it to buy up the new government bonds. The discretionary fiscal policy affects the personal attributes such as incentives to work, spend, save and investments.

Here and Now
Knowing that the economy is in a recession, there is a natural rate of unemployment that can be stimulated by tax cuts to cause the fiscal policy to increase the Aggregate demand on a short run basis. This will be demonstrated by increase of output and employment. In the long run the Aggregate demand will reflect a revival that is equal to increase in price levels and a decrease in output. Consequently, because of the long run of a recession it is suggested to run a budget deficit by increasing government expenditures in excess of current tax receipts. The increase in government expenditures should be sufficient to cause the aggregate demand curve to shift to the right, thereby restoring the economy to the natural level of real GDP. Any increase in aggregate expenditures has a multiplier effect on aggregate demand. The government only needs to increase its expenditures by a small amount to cause aggregate demand to increase by the amount necessary to achieve the natural level of real GDP. Many Keynesians urge that expansionary fiscal policy provides a quick way out of a recession and is to be preferred to waiting for wages and prices to adjust, which can take a long time. Changes in Aggregate demand are not caused by changes in the price level. However, they are caused by changes in the demand for any of the