Who Makes Better Use of Tax Cuts - Essay Example

Effective Tax Cut: Who makes better use of tax cuts Introduction A tax cut is the reduction in tax that leads to an increase in the income of the person being taxed and a subsequent decrease in government revenue. The government may give a certain group of its citizens tax cuts aimed for various reasons. The government for instance, may give a tax cut so as to persuade a group of citizens with a certain range of income to start investing. The government may also cut taxes on certain commodities to entice people and corporations to invest in them. The tax cuts aiming at enticing corporations and people to invest in certain fields are calculated as risks since the government cannot guarantee which course the people will channel their extra income to. The issue of tax cuts has been contentious between the democrats and the republicans since early 1960s. Earlier on, the republicans were opposing tax cuts while the democrats were pushing for them. The tables have been overturned today, the democrats are in the opposition and the republicans advocate for tax cuts. Each of the parties has viable ideas on the issue but they have never harmonized and agreed on one idea. This paper will focus on effective tax cuts; who makes better use of tax cuts. How tax cuts stimulate the economy Tax cuts are mostly introduced by the government during recessions. The government gives a relief in tax at various levels to increase the total income that individuals and businesses receive. Due tax cuts, the government reduces the amount of revenue it receives from taxes and hence the need to close the gap arises. The government thus starts selling more bonds to the individuals whom are the beneficiaries of the tax cuts and foreigners. This stimulates expenditure at all levels in the economy and the government gets back the tax cut money (Chuck para 1). Who makes better use of tax cuts? It has been interesting to watch politics and how the government handles its operations since 2008. The issue of tax has been on the discussion board for a long time. Different parties have different points of view and the government has been torn between several viable decisions in most cases. Studying the politicians and their ideologies is particularly important since their decisions while in the government directly affects the citizens. It is therefore important for every citizen who receives income to familiarize themselves with the current tax issues. The information may also come in handy when deciding which candidate to vote for (Chuck para 3). The American government is run by the democrats and republicans. Philosophically, the democrats are liberals while the republicans are conservatives. The democrats advocate for minimum wages and for taxation to be progressive. They suggest that if taxes are raised higher, the income will be more. Republicans on the other hand advocate for wages that reflect free market. They oppose the increase of taxes on any class. Republicans advocate for tax cuts (Chuck para 6). Democrats are for the idea of raising tax so that the government can fund its numerous social agendas. Republicans on the other hand are more interested in big corporations and the rich people in the society. The republicans loot for the lowering of taxes in favor of the wealthy. The republicans believe that the government should by all means reduce its expenditure (chuck para 7). According to them, the government should only major on the most significant endeavors. They believe that citizens fund the government through taxes and therefore if the taxes on the citizens are reduced, the citizens would invest more. Republican government plans would aim at reducing taxes for businesses which would subsequently favor fast growth in business and in turn more employment opportunities would come up. The republicans further campaign for lower income tax to enable individuals to posses more disposable income and engage in business. The democrats adopt a policy aimed at raising various taxes at different levels in order to raise enough revenue for the government to spend. Democrats believe that the more the government spends, the better it is for businesses. Their core idea is to build the economy through government spending. They embrace Keynesian economics which proposes that when the government engages in projects, these projects generate more income into the economy. Keynesian implies that prices are often stable and whether it’s the government spending or the consumers, the economy eventually grows (Lafaive 4). According to Keynesian, the goal of tax cuts is to inject money back into the community to encourage more business activities among the people. Keynesian campaigned for deficits in the markets. The government would have to increase its expenditure or at least maintain its spending during a recession (Lafaive 5). The tax cuts would then translate to a cut in government expenditure. The tax cuts would particularly target the lower class to encourage them to get involved in business. Keynesian was strongly against savings. As much as the two parties have varying philosophies and ideologies, they also agree in some areas. They both believe that the government should cater for basic infrastructure like roads, building of schools among other social amenities. Democrats are also for the idea of reducing taxes for the middle class so as to promote them to undertake business activities. The evident difference between the two parties’ tax policies is that the democrats favor the middle class and owners of small businesses while the republicans favor the upper class and large corporations (Welch & Bello 7). The basic concept of tax cuts and tax raises is that the marginal tax rate is lowered or raised respectively. Whether the government in power employs the republican taxation policy or the democrats’ policy, business owners and their workers are affected. Republicans policy on taxes has been criticized to benefit only the wealthy while the democrats’ policy seems to oppress the wealthy. In general, the two parties provide viable policies but the democrats’ policy makes more sense since the majority of the people fall in the middle class bracket (Welch & Bello 9). Both the democrats and the republicans have plans that they would implement to reform their taxes. The democrats suggest that they would do away with the taxation gaps in the corporate sector and the wealthy businesses and subsequently implement tax cuts on the middle class (Welch & Bello 10). This would give a little liberation to the workers and their economic status would escalate a little. The republicans on their part suggest that all classes should be subjected to equal taxation or a two-rate flat tax. They also support minimizing the tax rates on specific social and religious organizations. In order to harmonize the two parties and come up with an optimum solution to their differences, just a few changes would be made to the republicans’ policy (Fox para 1). The middle class should be subjected to a slight raise in their marginal tax rate. They are the majority and a lot of revenue would be raised for the government. There should be tax cuts for the wealthy and big corporations. The lower class also deserves the tax cut to raise their economic status. This opinion would however face strong criticism from both parties. The main aim of the opinion above is that the tax cuts on businesses would encourage more investments and the creation of job opportunities. This would increase productivity and boost the economy. The unemployment problem would thus be solved by the many expanding businesses that would increase their demand for labor. Since the investments would increase at all levels, other businesses from all over the world would also be enticed to invest in the country due to fair tax rates at the upper class level (Fox para 4). Skeptics would criticize the opinion above as invalid since tax cuts for businesses would just give more money to the rich (Kogan & Aron-Dine). Most of the businesses existing today are owned by the filthy rich members of the society so the move would have minimal effect on the job market. The opinion would also receive a lot of resistance from the middle class who are actually the majority in the society. They would be against raises in their marginal tax rates. Over the years, various heads of states have employed varying taxation policies. Their effects have been manifested during their terms in office. Those who succeed them later change the policies depending on their philosophies. Democrats’ presidents have generally performed better economically as compared to their republican counterparts (Bartels 3). During their administration, democrat presidents have lowered both unemployment and income inequity. Skeptics have criticized the above hypothesis and claimed that there has been a minimal difference between the two parties’ administrations in the economic performance. They claim that the economy was always almost crumbling when the republican presidents were taking over from the democrats. Eisenhower for instance, inherited a poor economy from Truman, Nixon also found the economy breaking down when he replaced Johnson in the office and Reagan faced the same bad economy from Carter (Bartels 6). In the current administration, the democrats and republicans are still debating on tax cuts. The democrats argue that the rich are receiving huge tax cuts and that they are not effective in growing the economy. Skeptics argue out that heavy taxes on the rich are a punishment for their success but the democrats retaliate and claim that progressive taxation allows a little relief to the middle class who basically are the majority (Bartels 6-7). The republicans on the other hand are strongly footed into cutting taxes for the businesses and corporate. They argue out that the democrats claim that the government creates jobs for the citizens where in reality it is the businesses that create job opportunities when they expand (Bartels 7). The republicans therefore strongly campaign for tax cuts in the upper class so that the rich can expand their businesses. Republicans are totally against income tax. Republicans have been in the supply side for many years. However, a few democrats also opted for tax cuts during their terms in presidency. When John F. Kennedy was in power, he proposed a tax cut on individuals (Niskanen 1). The proposal was passed by Lyndon Johnson when he came to power. The main aim was to catalyze investment among individuals for a long term growth in the economy. When Ronald Reagan took presidency, he made tax cut a law. This had a positive effect since government revenue increased by 50%. However, there was a negative effect on the deficit and the total National balance which escalated significantly. This was because the rate at which the government expenditure grew was not directly proportional to the increase in revenue collected. The spending was extremely higher than the available revenue. Consequently, the percentage of income tax over the GDP kept falling (Niskanen 2). Reagan’s move eventually resulted to a significant increase in revenue. Critics however believe that the increase in revenue was caused by minimizing the government expenditure. They also believe that the Omnibus Budget Reconciliation Act, which advocated for tax increase, and the use of the pay-as-you-go method influenced Reagan’s revenue success (Niskanen 4). The Bush Tax Cuts that were made into law by President George W. Bush led to the rich bearing a heavy tax burden while the poor got a relief in taxes. Benefits of the tax cuts were experienced across the board. The middle and lower classes experienced some of the benefits but the main effect was felt by the rich. The tax cuts stimulated growth and the increased government spending paid off the cuts (Friedman & Shapiro). According to Lynch in his book “Rethink Growth strategies”, a tax cut does not necessarily result to increase in investment by the corporate or small businesses. Lynch explains that all state and local duty are not that significant in total and therefore a cut in them usually doesn’t make any noticeable difference. Businesses expansions are more enticed by the availability of skilled labor and market for the products. However, there is undisputable evidence that an increase in tax to generate more revenue that is later channeled to develop public services ultimately results to economic development (Lynch 1). Lynch further argues that whether there are tax cuts or not, critics will always be there to counter argue the consequences of the policies. It is however clear that the best approach is to increase taxes and use the acquired revenue to promote economic growth rather than introduce tax cut to stimulate expenditure. The introduction of tax cuts result to a decrease in government revenue leading to government being forced to lay off employees. Even if the tax cuts end up increasing job opportunity creation, the new jobs are just a cover up for the ones that the government losses. It is therefore not a logical move to use tax cuts as incentives for business expansion (Lynch 2). Lynch doesn’t believe that tax cuts are the best way to use government returns. He advocates for tax increase and the use of the gained revenue to improve public services to promote economic growth. This will in turn make the lives of citizens much better and thus the financial system will develop. Lynch embraces a government that works for the people and vice versa rather than a government that entices the people to work for themselves (lynch 2). The republicans’ philosophy seems to attract more criticism from Lynch. He claims that reduction of government revenue risks the local government not being able to finance its duty to cater for public amenities and infrastructure. Roads for instance, are important for long term growth of the economy and if the government does not invest in maintaining and building new roads then it will affect the economy eventually. The democrats in their part are better off since they advocate for more government expenditure and investments through revenue (Lynch 3). Conclusion Every government that takes power to administer the states has economic growth as its main priority. It is therefore important that the strategic plan that they put in place be practical. Some governments aim for immediate positive changes while others focus on long term goals. Whichever the case, the tools they employ to achieve their goals are what matters. Some of the tools they use receive huge criticism. Tax policies are what most governments implement to favor their strategies. The United States has been ruled by democrats and republicans over the years. Republicans advocate for tax cuts across the table. They favor the wealthy and huge corporations in order to entice them to create more job opportunities for the entire community. The republicans achieve this by limiting government budgets and only undertaking expenditures on the most vital courses. Their policy has worked in several administrations and has given satisfactory results but it never goes without criticism from their democratic counterparts. Democrats on the other hand opt for progressive taxation whereby the more the income the more the tax. Democrats believe in a working government that invests to create employment opportunities and promote growth. Skeptics view the democrats’ philosophy as oppression to the wealthy since they pay more taxes. The government receives a hefty part of its revenue from huge corporations and businesses. Generally, both parties have very good ideas. If one could borrow ideas from both sides, it would result to a very efficient plan that would greatly favor the economy. However, politics will always rule and it’s up to every individual to choose the side that works best for them. Democracy will prevail and the majority will rule as the minority puts up with them. Works cited Bartels, L. M. Unequal democracy: The political economy of the new gilded age. Princeton, NJ: Princeton University Press. 2008. Chuck. Democrat vs. Republican Tax Cuts. Hubpages.2012. Web. http://chuck.hubpages.com/hub/Democrat_vs_Republican_Tax_Cuts_. 25 Apr. 2012. Fox, Justin. Tax Cuts Dont Boost Revenues. Time Magazine. 2007. Web. http://www.time.com/time/magazine/article/0,9171,1692027,00.html. 25 Apr. 2012. Friedman, Joel & Shapiro, Isaac. Tax Returns: A Comprehensive Assessment of the Bush Administrations Record on Cutting Taxes. Center on Budget and Policy Priorities. 2004. Kogan, Richard & Aron-Dine, Aviva. Claim that Tax Cuts "Pay for Themselves" is Too Good to Be True. Center on Budget and Policy Priorities. 2006. LaFaive, Michael. Tax Cuts vs. Government Revenue. Mackinac Center for Public Policy. 1997. Lynch, Robert G. Rethinking Growth Strategies:. Washington, D.C. : Economic Policy Institute, 2004. Niskanen, William A. (1988) Reaganomics: An Insiders Account of the Policies and the People, Oxford: Oxford University Press, 1988. Welch, William & Bello, Marisol. Dems call for ending tax cuts for rich. USA Today. 2007. Read More