Investment in Early Childhood Education, Arguments for and against Business Tax Cuts - Assignment Example

What are the arguments for and against business tax cuts as a strategy to spur and local economic development? Arguments for the use of business tax incentives to generate jobs and drive economic growth usually revolve around competitiveness issues, the business climate, demand-side concerns, supply side concerns, and tax burdens. In the Tax burden argument, proponents hold that taxes either increase business costs significantly or substantially reduce revenues (Lynch 4). Either way, the taxes, cause a significant drop in business profits. Additionally, business tax cuts allow companies to retain more revenue and reduce business costs, which increase profits. Tax cuts for businesses encourage the company to expand, invest, or stay in the state through enabling the probability of higher profits. In addition, it stimulates new companies to start up and convince other companies to relocate to state that offers these cuts. Tax cuts lead to job creation, via the promotion of greater activities in business. However, local and state taxes are not that huge of a burden on the business and the reduction in profits is small in comparison (Lynch 5). Rates of after-tax profits in industries are also not significantly varied by different states and jurisdictions. Finally, these taxes should not be seen as burdens but as a provider of financial support to public service that act to reduce business costs. Another argument for Business tax cuts has to do with the supply side, which contends that business tax cuts provide incentives for jobs, as well as leading to an increase in investment and savings, which stimulates economic activity (Lynch 7). Lower business taxes could encourage businesses to retain more earnings and, thus, avail more funds for increased investment in business that is vital for growth of state and local economies. Tax cuts for businesses also allow incentives for business investments, via increasing the profitability inherent in the investment and providing funds for firms to invest by allowing firms to retain more of their earnings. However, a counter-argument contends that the positive effects that are inherent in tax cuts on savings and work effort have been greatly exaggerated by the proponents of this argument (Lynch 8). In fact, tax cuts could act as a disincentive for people to work. Additionally, although tax cuts for businesses may result in sizeable gains, in savings, for businesses and individuals, the gains will not lead to a decrease in interest rates or a productive investment increase in particular jurisdictions. The effect of the demand side argument is likely to reduce growth of the economy and a slowdown in employment creation. A third argument for the implementation of business tax cuts by local and state administrations is the demand side argument. This argument contends that business tax cuts stimulate the local and state economies by making an impact on consumer spending (Lynch 9). When business taxes come down, individuals and businesses are left with increased after tax incomes. Some of these after tax increases could be saved while the rest is spent on the purchase of more services and products. Increased spending will have a corresponding effect on business volumes of sales and allow firms to produce more products and services. As the companies produce more of these, they will have to hire extra workers. Therefore, employment numbers are increased by business tax cuts. Conversely, while local and state tax cuts can cause businesses to use more of their earnings on investment, they also lead to a reduction in government revenue that leads to reduced spending for local and state governments (Lynch 9). Probably, this will result in the drop for in-state spending. Additionally, this very same theory can be utilized for justification in the increase of local and state taxes. The business climate argument holds that local and state governments can promote the development of the economy by improving on the business climate (Lynch 10). The business climate can be defined as a combination of factors that improve the investment attractiveness of a region. Its proponents claim that business tax cuts will improve the business climate. Lower taxes will spur economic growth as they lead the state to be viewed as supportive of business. A counterargument contends that decision makers are unlikely to be swayed by perceptions instead of facts. Companies that rely on perception for growth are likely to see less success and could be removed from business by companies that are savvy (Lynch 11). Tax cuts are not a wise move for local and state governments. Additionally, these tax breaks could have a diverse effect on other factors that factors that affect the business climate, for example, efficiency and comprehensiveness of public services that are damaged by tax cuts. Finally, the competitiveness argument sates that business tax cuts will act, as an incentive to draw more businesses to the state and local jurisdictions. While it is acknowledged that this argument could lead to a loss of revenue and cutbacks in service provision, tax incentives may lead to the relocation of firms to the state or persuade existing businesses to stay in the state (Lynch 12). A decline in services to the public may be a disadvantage, but states have to offer it to avoid losing out on business investments to other states and local jurisdictions. 2. Why might investment in early childhood education be a more effective strategy? Providing children living in poverty, with a quality, early childhood development program stands at 20% in the US, and this could portend a high payoff for taxpayers and the government in the future (Lynch 4). This is because this is expected to lead to a decline in welfare benefits, criminal justice, and costs for special and remedial education. Once these children enter the labour force, they will have higher incomes that could be used to pay back society in the form of taxes. Children who grow up poor turn into adults who are more likely to become criminals, engage in substance abuse, abuse and neglect children, as well as suffer from a wide variety of mental and physical illnesses. They are also unlikely to be involved in constructive employment, and this will make them less likely to participate in economic growth (Lynch 7). With fewer skills, less productivity, and low earnings, these individuals will be of little help in the sustenance of an effective retirement benefits system for the public, for instance, social security, which is happens to be a major problem that America will face in the coming years. The consequences of childhood poverty on America’s collective economic well-being and health are fraught, with profoundly negative consequences that need addressing now if they are to be mitigated. General benefits of early childhood education in this case include higher levels of intellectual, mathematical, and verbal achievement, greater academic success in school (Lynch 7). This includes lower rates of grade retention, as well as higher rates of graduation from college, higher rates of employment and employment earnings, better health outcomes, lower dependency on government welfare, lower crime rates, and increased revenues by federal, state, and local governments coupled to lower expenditure by the same jurisdiction. Investing in early childhood development programs easily pay for the efforts over a period via the generation of high rates of return from the beneficiaries, the government, and the public at large. Well executed early childhood development programs produce more than $3 in average benefits for every dollar that is invested into the program (Lynch 14). The increased earnings for children who are involved in early childhood development programs allow the US, to compete more favourably in the global economy and have positive implications for both future and earlier generations of young individuals. Increased earnings should also benefit earlier generations that reach the age of retirement and rely on social security and benefit programs aimed at public retirement. The future generations are also set to benefit since they are less likely to be brought up in poor families. The economic benefits, from early childhood development investment improve the skills of young individuals who will later become part of the US workforce and could act to raise the country’s GDP, reduce relative poverty in the US and global competitiveness. In 45 years, the increase in earnings is expected to boost GDP by a whopping $107 billion. Coupled to decreased crime levels and the drain on the public system by criminal activities, which is expected to drop by $155 billion, ECD is a plausible way of spurring economic growth (Lynch 15). Works Cited Lynch, Robert G. Exceptional Returns: Economic, Social, and Fiscal Benefits of Investing in ECD. Washington, D.C.: Economic Policy Institute, 2004. Print. Lynch, Robert G. Rethinking Growth Strategies: How State and Local taxes Affect Economic Development. Washington, D.C.: Economic Policy Institute, 2004. Print. Read More