September 13, 2010

Tax Cuts and the Deficit

This article deals with two major issues in the American economy: the national deficit and the tax cuts imposed by former President Bush. The writer of this article focuses mainly on the relationship between the tax cuts and the deficit. The author points out that if the tax cuts remain then the deficit will continue to grow and the nation's economy will be put in a more uncertain position. What the author forgets to include is the benefits that the tax cuts could have in helping the economy recover.

Ever since Obama has been in office he has been tasked with helping curb the deep economic recession that the US currently is in. His first attempts at turning around the economy can be seen in the stimulus packages that he passed in an attempt to "spark" the economy. Bush's efforts to help the economy was seen in his tax cuts that he passed in 2001 and 2003. This is a classic example of conservative economic views against a more liberal economic stance that includes more government involvement.

As we have studied in class, government involvement in the market place often leads to excess demand (NY housing/price ceilings) or excess supply (wheat overproduction/price floors). What Before I continue, i want to point out that this is not a sermon against Obama and his policies, because he was under immense pressure to do something about the economy and to do it now, which is why many people chose to vote for him. What I am trying to say is that under many circumstances government involvement in the market, as we have studied in class, leads to many situation other than the maximum output in the market.

Looking at the demand function (f(d)=(P,Ps,Pc,I,Nc)) we can see that income is a variable in this function. By keeping the tax cuts that Bush instituted this would allow consumers to keep a higher percentage of their earnings. If the tax cuts were abolished and higher taxes on the wealthy were put in place the government would be able to decrease the deficit but consumer income would decrease. If the demand function is used as explanation to what would happen in theory, the demand for normal goods would increase if consumer income increases. Increased demand would lead to greater sales of products and an overall improvement for our nation's industry. If Obama is trying to help "stimulate" our nation's industry it would seem wise to keep the tax cuts in place and allow our economy to recover.

To assume that consumer spending and demand would increase we have to make several other assumptions to keep this true. We have to assume that people would take the extra income they are receiving and actually spend it instead of save it. If people took their increased income and saved a higher percentage of it instead of spending it in fear of higher taxes in the future, then this theory would not keep true. To explain this in today's world, a consumer fearing higher taxes might decide to put away an extra $10,000 in savings for their kids education instead of going out and buying a new car. So in order for my theory of increased income and demand to stay true, I have to assume that consumers would be willing to spend the extra income they would receive.

The author of this article is very concerned about the nation's deficit, but that is not the issue that I am trying to tackle here. The author chooses to completely focus on the relationship between the deficit and tax cuts and completely ignores the benefits that cutting taxes could have on the economy. Looking at this issue from a micro-economic perspective and how taxes affect the individual consumer can offer deeper insight than the author gives here. Instead of using big news channel buzz words like "deficit" and "tax cuts", a look into microeconomic theory shows that a turnaround of the economy may not best come from government spending, but from the people.

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