Tax Cuts and Reviving the Economy, Essay Example

Tax cuts have been the key to bringing countries out of recession (Coultier 2007).  When President Obama pushed Congress in 2009 to enact legislation that would extend Bush Administration cuts and create new tax incentives, he stated that “we should reduce the tax burden on working people, while helping Americans go to college, own a home, raise a family, start a business and save for retirement. Those goals are the foundation of the American Dream, and they are the focus of my tax policy” (CNNMoney.com 2009).  This statement indicates that when individuals pay less in taxes, they have more discretionary income, i.e., money to spend as they choose; and that they will put it back into the economy, purchasing goods and services.  It is this redirection of income that stimulates economic growth.  As consumers purchase inventory, companies’ revenues increase and they have funds to grow. That growth leads to job creation, which reduces the unemployment rate and moves the country out of recession.

There are some that would argue that tax cuts create a shortfall in tax revenue to the Treasury Department, but that is not the case.  There is only a delay in collection:  taxes are paid by the companies that benefit from increased sales and services (Coultier 2007).  The Treasury collects taxes on sales volume and also on the increase in payroll.  The payroll tax is the second largest tax base to the US, and as it increases, it replaces the budgetary gap created by the cut (Coultier 2007).

A country’s wealth is determined by its aggregate demand or Gross National Product (GNP), which is calculated as the sum of Consumer Spending, Investment Spending, Government Purchases, and Net Exports.  Consumer Spending constitutes the bulk of GNP – almost two-thirds (Coultier 2007) – so when individuals buy more, GNP grows exponentially.   The largest cuts should be directed to the middle class, and the remainder to the wealthiest individuals.  Those in the middle class tend to spend the savings gained from tax cuts, thereby putting money back into the economy and stimulating growth and recovery (i.e., increasing the Consumer Spending quotient).  Wealthy individuals tend to invest savings gained from tax cuts, which increases the Investment Spending quotient, but not to the extent of Consumer Spending (Coultier 2007).

In conclusion, tax cuts can help revive the economy by giving individuals more discretionary income, thereby stimulating growth and increased tax revenue.

References

Coultier, Richard, (2007) “Do Tax Cuts Stimulate the Economy?” Investopedia. Retrieved from http://www.investopedia.com/articles/07/tax_cuts.asp?viewed=1.

CNNMoney.com, (2009) “Obama:  Tax Cuts Help Workers and Economy.  President calls workers ‘the backbone’ of the economy.” Retrieved from http://money.cnn.com/2009/04/15/news/economy/obama_taxes/index.htm