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, the 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.
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