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Macroeconomics - Essay Example

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Macroeconomics The article selected for the project is “Do Tax Cuts Leads to Economic Growth” (Leonhardt, 2012). The article is focused on the US economy and described about the impacts of tax cuts on the economic growth. The article is written in technical language of economics and it seems that the author has conducted an in depth analysis on the US Economy…
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Macroeconomics

Download file to see previous pages... In order to justify the arguments mentioned in the article, the author has used different economic theories. Equilibrium Theory of Economics: The author of the article implicitly described that the political leaders believe that the equilibrium in the economy will be achieved with the help of tax cut strategy. The assumption that lies behind the strategy of tax cut was that by reducing the taxes the economy will grow further and the economy may be able to achieve equilibrium position. First of all, it is important to develop cognizant regarding the equilibrium theory. Equilibrium theory of economics depends upon the behavior of demand and supply along with the prices of the whole economy (Scarf, 2008). The combination of quantity and the prices, where demand equals supply, is referred to as the equilibrium point. This equilibrium point is the point, where the economic growth is at its peak. The strategy, which is being followed by the US Govt. since last 10 years, was to reduce the taxes so the purchasing power of the people can be increased and the economic growth can reach approximately at its peak. Implicitly, the Govt. of United States Of America is assuming the equilibrium theory of economics persists. ...
The strategy of tax cut prevails throughout the period. Now the question arises why the tax cut strategy could not be successful? The answer lies in the explanation of Keynesian Theory of Economics. Keynisian Theory Of Economics: One of the most significantly studied economic theories by the author of the article is the Keynesian theory. The Keynesian theory describes the fact that there are number of different factors that must be considered when studying the cause and effect relationships (Keynes, 2004). The article has beautifully described the facts that during the period of tax cuts the economy could not grow properly, but the period of economic growth could be significantly seen when the tax rates were high David Leonhardt, the author of the article has conducted the correlation analysis. The basic concept behind the Keynesion economic theory is that the aggregate demand and supply may never be equal for the economic growth. In other words, the equilibrium point, where the demand equals supply may not necessarily be the point of highest economic growth. The reason is that there are many other factors that may have profound impacts on the economic growth. The US Govt. must also consider those other factors to define the economic growth. The basic presumption behind the tax cut strategy, was that in short term the tax cut put money in the people’s pocket and in the long run people will work harder if they keep more of the next dollar they earn. The Govt. did not focus on other related and important factors. One of the most important considerations was that the people who care about hitting the specific income target might work less because they can hit that particular income target more easily. In addition to this, the economy has also experienced deficit, ...Download file to see next pagesRead More
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