The paper answers the questions concerning the U.S economy. Decrease in taxes will definitely help the U.S., as it will produce a stimulating effect on the economy. The country experiences recession and tax policy can help in this situation. Increase in government spending is also important, as it results in aggregate demand increase, and it, in turn, increases GDP income and prices in short run. However, taxes decrease has greater impact on the U.S. economy.
Keywords: economy, taxes decrease, increase in government spending
1. Decrease in taxes will definitely help the U.S., as it will produce a stimulating effect on the economy. The matter is that it will result in increase in consumption. It should be pointed out that today U.S. experiences economic recession, and tax policy can help in this situation. The thing is that recession causes fall of incomes, and taxes decrease presupposes preventing the economy from falling into recessionary gap. Researcher Nikolas Karagiannis in his book Modern State Intervention in the Era of Globalization (2007) states:
‘A decrease in aggregated demand in an economy causes economic recession, and if the economy is to come out of the recession the aggregate demand has to be raised by increasing public expenditures or decreasing taxes. An increase in consumption motivates private enterprises to increase production, which results in increases of incomes and demand. Therefore, both production and income are increased in relation to the first (starting) increase of demand, which was caused by a decrease of taxes’ (128).
2. At first it should be stated that fiscal policy is the government’s main weapon against economic recession. Increase in government spending results in aggregate demand increase, and it, in turn, increases GDP income and prices, in short run. While discussing the impact on the economy, it is worth mentioning that decrease in taxes has greater effect on the economy. The matter is that U.S. government spends less than other European countries (approximately 30% of its GDP). Lawrence Gitman (2008) points out:
‘The more government buys from businesses, the greater the business revenues and output. Likewise, if consumers or businesses have to pay less in taxes, they will have more income to spend for goods and services. Tax policies in the United States therefore affect business decisions’ (18).
Gitman, L. (2008). The Future of Businesses: The Essentials. Mason: Cengage Learning.
Karagiannis, N. (2003). Modern State Intervention in the Era of Globalization. Cornwall: Edward Elgar …