Richard Reia Ch 1 Less or more As we approach the next polit

Richard Reia Ch. 1- Less or more? As we approach the next political cycle, we\'re already hearing two opposing sides (eg.\"Lower taves, less govemment\" versus \"more help, more programs\"). What are some of the economic issues involved here?

Solution

There are two alternative fiscal policies which are present here that could be used as expansionary measure. One is to reduce tax and reducing the government expenditure. Another one is to increase the ta so that government spends more on public policies and programs for society\'s welfare.

However neither of the two policy can be selected without considering the current situation of the economy. The first option \"to reduce tax and reducing the government expenditure\" would shift the equilibrium for goods and services and owuld hence decrease the producers and consumers surplus causing deadweight loss. The demand side theory argues that the tax cut would increase the savings and investment stimulating the economic growth but studies show that it is not necessary. It has been learned that tax reduction (under prograsseive tax system) hardly affects as the tex reduction increases disposable income of high income earners majorly and savings and investment generally increases when lower income earers get tax cut.

On other hand if the taxes are increased and the government size also get increased then the effect of increased spending can be counter balanced by the tax increase. This will make no change in aggregate demand as required per expansionary policy, What is required here is that some protion of government speding should also be financed from other sources like debt so that the effect of increase on tax on savings and investemnet by private individuals is lesser than effect of increase in government spendiing.