Paper Example on Effects of Current Tax Changes to the Economy

Published: 2021-08-18
707 words
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University of Richmond
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Tax systems work in addressing social and economic matters as well as promoting equity. Their primary goal is to finance the public expenditure. This, therefore, provides a reason why they will need to reduce the governments cost of administration and cost of compliance of the taxpayers at the same time discouraging tax evasion. Taxes cut across households to firms. Households are affected by taxes through the ability to save, provide labor and invest in the form of human capital. It is important therefore to note that it is not only the level of taxes that generate revenue, but also the design and combination of these particular tax instruments. A change in individual income tax poses a long-term effect on the growth of the economy. Lowering the tax rates will motivate individuals to work hence promoting the culture of saving and investing. However, there is a likelihood that the national budget raises through borrowing and this will lead to decrease in national savings and to rise of interest rates. This will happen as a result of lowering the tax rates without immediately cutting on spending cost as well. This, in the long run, will drag the process of long-term growth, in that it will either be small or tend to the negative side (Gale & Samwick, 2014).

There is an equal effect felt on aggregate demand when a budget deficit is substituted for current taxes as proposed by the RICARDIAN EQUIVALENCE. When the government decreases taxation, it gets exposed to a future budget deficit. Consumers will, therefore, need to save for paying off these "future taxes". This ideally becomes like paying current taxes. The implication of this Ricardian Equivalence is that employment and output will not be affected by a short-term because aggregate demand will not have increased (Johansson et al., 2008). The government by trying to reduce cases of unemployment, maintain stability in prices of goods and service and implement sustainable growth of the economy it uses voluntary disbursement as a means to achieve the above (Feldstein, 1995). It is typical that when the private sector businesses will spend less if the government will be spending more money. This reduction will render the government investment irrelevant as its value diminishes. An instance whereby the government has invested in supporting the internet infrastructure causes the major service providers not to invest or lower their investment on infrastructure as well. This is an incident of DIRECT EXPENDITURE OFFSETS.

Another thing that is used to depict a change in marginal tax rates and how it influences the economy is the SUPPLY-SIDE EFFECT or economy. This implies that output, efficient use of resources, and income are discouraged by high tax rates which play a major role in the motivation to earn (Gwaetney, 2008).

The measure of the value of goods and services of a countrys borders at market price is known as Gross Domestic Product (GDP). The GDP is used to measure the economic status of the country, and it can affect the economy either negatively or positively. This makes it a matter of close monitoring by the financial analysts of that particular country as well as the government officials. Changes in currency are affected by the release of the GDP data, by either appreciating or depreciating. If the GDP drops or rises, it will cause the government to come up with policies that will address the matter, either a policy that will lift the economic status or one that will maintain its growth. In addition to that, interest rates are also affected by an increase or decrease of GDP. An economy that has grown as a result of an increase in GDP is an indicator that there is much expenditure from the people (Samwick, 2014).


Feldstein, M. (1995). The effect of marginal tax rates on taxable income: a panel study of the 1986 Tax Reform Act. Journal of Political Economy, 103(3), 551-572.

Gale, W. G., & Samwick, A. A. (2014). Effects of income tax changes on economic growth.Gwartney, J. D. (2008). Supply-side economics. The concise encyclopedia of economics, 482-485.

Johansson, A., Heady, C., Arnold, J., Brys, B., & Vartia, L. (2008). Taxation and economic growth.Mullins, D. R., & Joyce, P. G. (1996). Tax and expenditure limitations and state and local fiscal structure: An empirical assessment. Public Budgeting & Finance, 16(1), 75-101.

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