American Fiscal Policies and Economic Growth - Example

8th April American fiscal policies and economic growth Fiscal policy refers to the use of taxation and expenditure to impact on the economy of any country. Specifically, an economy of a country relies on the major instruments of fiscal policy which entails government expenditure on the various sectors of the economy and changes in the taxation system. As a result of the changes that the government can make on the two components for example through the ministries of finance or planning, various macroeconomic variables can be affected. These include income distribution, aggregate demand and allocation of resources. Apart from taxing the residence and non-residence, government expenditure can be funded through various other mechanisms. These include selling of fixed properties such as land, borrowing locally or globally and seigniorage among others. The three major stances of fiscal policy as indicated by Hansen 36 include contractionary, neutral and expansionary fiscal policies. Based on the wide range of activities that the US government spends funds on including security, healthcare, education and transport among others, it has to ensure that it has to ensure it has effective ways of collecting revenue. This paper will discuss American fiscal policy and economic growth. In its effort to increase annual revenue and effectively provide public goods to its citizens, the US government has put effective taxation policies. Being set up on state as well as federal levels, US government has set up various taxes through which residents and non-residents are in a position to contribute to the economic growth of the country. Examples of taxes include capital gains, sales and income tax. Even though the major source of government is tax, federal taxes are separate from state taxes. This implies that the federal government does not have an impact on the state taxes. As the result of various methods of tax collection as well as payment to different levels of the governments, the US tax system is one the most complex in the world. As the result of the tax regulations, US has lowest black market while the wealth tax is not allowed. As a way of expanding tax base and increasing the government revenue, conservatives as well as the liberals have regularly been calling for introduction of more taxes that are progressive in nature. Through annual budget negotiations, the overall taxation level is decided and then implemented through effective communication process and collection. In most of 1980s as well as 1990s, the government was running up in deficit an aspect that was allowed by most American’s. This has now changed with most Americans providing an opinion that the budget should be balanced with tax collected being equal to the expenditure incurred by the government. In the same way, in the past few years, democrats and republicans provide various views on how the government should run its budget and taxation. For example, Republicans support smaller government and reduction in taxes while of their part, Democrats support increase of taxes and expansion of tax base in order to support the activities of the government. One of the most substantial regulations in the United States tax system is the 1986 Tax Reform Act. The Act aimed at reducing the rates of income tax while most of the deductions related to income tax were cut back. However, Individual Retirement Accounts (IRA) deductions and home mortgage deductions were not affected by the Tax Reform Act strategies. Tax Reform Act was a replacement of 15 tax bracket which comprised of 28 percent and 15 percent tax brackets. Further provisions adopted by the US government have made a large number of low income earners US residents and non-residents to pay low or no income taxes. Government spending Based on the high population and the high demand for public goods, the US government spends large amount of funds on the public sector. All the government levels have the responsibility of providing quality services to the US residents. For instance, state government main duties include servicing and maintenance of highways, financing public learning institutions, and constructing highways among others. On its part, the federal government major responsibilities includes providing national security, research and development, creating employment, provision of higher education, space exploration and opportunities to improve workers skills among others. This implies that the government is engaged in quite a number of services. For example, in 1998, the spending by the state, federal and local government represented 28% of the US GDP. As the result of high expenditure by the federal government, the country debt continues to increase. For example, in 2009, approximately $10.627 trillion federal debt was reported. One of the major strategies that the US government adopt in order to maintain its expenditure at a sustainable level is raising the debt ceiling. For example, in 2005 the debt ceiling was $8.18 trillion. In 2006, the debt ceiling was raised to $8.97 trillion. As the result, the government has continued to experience an increase in revenue thus making it possible for the various levels of government to provide public services. As the result of the need for higher revenue to address the increased expenditure, the ceiling was raised to US$ 11.3 trillion in 2008 by the Emergency Economic Stabilization Act (Heniff and Keith 58). This was followed by more increase in 2013, when the debt ceiling reached US$ 17 trillion after being raised by US$ 670 billion. Significant portion of the revenue collected by the US is spent in major services that are highly demanded in US. The table below indicates major expenditures in 2013 financial year. Expenditure Amount ($ billion) Social security 803 Medicare and Medicaid 760 Interest 260 Defense 608 While all the expenditures are vital, there are three mandatory spending that the government must accomplish. These include Medicaid, Social Security and Medicare. Through the taxes that is paid by the employees and the self employed individuals, they are entitled to Medicare and Social Security thus the two category of expenditure are referred to as entitlements. Due to the demographic factors including increasing population, mandatory expenditures are expected to increase and expand their share of gross domestic product. Thus, the government will need to employ effective systems to deal with the tax evasion to avoid loss of funds that are highly needed for the government to achieve its objectives. Another category of expenditure is discretionary spending. These include military and non defense spending. For example, in 2012 the department of veteran affairs spent $124 billion, Homeland security department $47 and defense department $651 billion. The US defense department takes approximately 4% of the country GDP. Milakovich and Gordon 21 argue that this is mostly based on the wars and military operations in various parts of the world including Afghanistan and Iraq war. Non defense discretionary spending includes expenditure incurred in department of education, environmental protection agency which is on of the major independent agencies in the country. Net interest entails the expenditure incurred on the debts obtained from the public. In 2012, the US government spent $223 billion as net interest which represented 6.3% of the total government spending. As the result of improved fiscal and monetary policies, US economy has continued to experience a sustainable growth. For example, income gains increased by 95% in 2011 as compared in 2009. Similarly, annual income that is received by the top 1% registered an increase of 20% in 2011 from 9% in 1976. According to the studies by Edward Wolff on the US wealth distribution, top 1% takes approximately 34 %, next 4% 27 percent, next 5% 11 percent, next 10% 11.9 percent, upper middle 20% takes 11 percent while middle 20% takes 4 percent and lastly the bottom 40% takes 0.2 percent. This is an indication of wealthy inequality that the country experiences as compared to countries such as Denmark and Switzerland. According to economic intelligence unit, America is the home of the highest number of world millionaires. For example, in 2008 approximately 16 millionaires resided in the country thus making the economy stronger due to the ability of the public to give debts to the public (Heyne and Boettke 29). Additionally, the wealthy Americans have initiated large investments including industries and private institutions that act as major sources of employment. The high income inequality in the country has also resulted to reduction in social mobility. This calls for government intervention by initiating more fiscal and monetary policies to address the rising income inequality. The US economy is the largest in the world with more that 155 million employees. As the result of improved economy and expansive investment portfolio, more job opportunities have been established resulting to improved household income and high demand for goods and services. High number of employees approximately 54% is employed by small businesses while the large firms employ 38% of the entire workforce in the country. The government employs 8% of the workforce. As indicated by Robert, Kirk and Johnson 57 as the result of improved business operations and expansion strategies, small businesses have over a time changed to large businesses while new businesses have continued to emerge. As the result, the country level of employment has continued to remain relatively constant. Wal-Mart, the largest supermarket in the world, is also the largest private employer in US. Based on the appropriate business environment and the support of the government, US residents have continued to establish small business in the country regardless of their races. For example, 4 million businesses are owned by the minorities that includes the Asian Americans, Hispanics, Native Americans and African Americans who form a significant percentage of the US population. By generating approximately $700 billion to the government as annual revenue, small businesses play a significant role of absorbing the skilled workforce that is produced by the first class universities and colleges in the country. As part of improving the performance of the employees, Kenworthy 16 depicts that majority of the workers are allowed to join labor unions. Despite the high number of individuals who are employed by the US economy, the level of unemployment is still significant. In 2013, 12 million people were unemployed representing 7.7 of the population. One of the major economic issues that resulted to increase in the number of unemployment was the 2009 recession that was experienced globally. After the recession in 2010, more than 6 million Americans were looking for jobs. This led to increase in the percentage of unemployed people which stood at 9.9 of the entire population. Lon term unemployment, a key challenge that the US economy faced in 2013, has not only led to a decrease in the level of household income, but also it has affected the federal budget due to reduction in revenue. On the aspect of home ownership each US citizen in the country is estimated to own 700 square feet. However, the effects of global recession that included decreased prices of the assets globally, the value of the US assets decreased. Household wealth decreased to $14 trillion. Conclusion Based on the above discussion, it is clear that as the result of effective implementation of fiscal policies, the US economy has attained a sustainable growth. Major fiscal policies that the US government has established include taxation and government expenditure. Through the various taxes including income and sales tax among others, the government has been able to effectively collect high revenue from the large number of workers. Through the regulations such as the 1986 Tax Reform Act, the US government aims at curbing tax evasion which is a major challenge facing many countries. US economy is faced by challenges such as high wealth inequality and high expenditure in the sector of defense. This has made the budget to run in a deficit some years now. High revenue that the US government collect annually, has made the country to initiate various industries and research centers that have resulted to improved economy. Additionally, the increased number of wealth individuals has resulted to establishment of many small businesses that acts as a major source of employment. This has led to increased household income creating a high demand for goods and services produced by the country as well as the imported ones. Works Cited Hansen, B. The Economic Theory of Fiscal Policy. New York: Routledge, 2003. Heniff, B and Keith, R. The Federal Budget Process. Alexandria: Capitol.Net, 2009. Print. Heyne, T., Boettke, J., Prychitko, L.The Economic Way of Thinking. New York: Prentice Hall, 2002. Print. Kenworthy, L. 1999. Do Social-Welfare Policies Reduce Poverty? A Cross-National Assessment, Social Forces 77(3), 19–31. Milakovich, E and Gordon, J. Public Administration in America. Boston: Wadsworth Cengage Learning, 2013. Print. Robert, E., Kirk A and Johnson, P. Understanding Poverty in America. New York: Macmillan Publishers, 2004. Print. Read More