Question

A government is running a balanced budget. An election is approaching and the government decides on a one-time, temporary, massive tax cut that will cut tax revenue by $50 billion in one year; after the year is over, tax rates and tax revenue return to normal. The government decides to issue perpetual bonds of $50 billion to cover the cost of the tax cut. The interest rate on these bonds is constant at 6%. The tax to pay the interest in the future will be levied onthe private sector. Suppose that half of the population plans ahead and wants to leave enough in bequests to the next generation so that they are not harmed by future higher taxes. The other half of the population spends all they can now. a. What is the impact of the tax cut on domestic saving? b. What happens to consumption? c. Who buys the $50 billion of debt?.

Answer 1

A)impact of the tax cut on domestic savings:

When we take tax cut portion,washington is still concentrating on tax cut portion it is proposed by george W bush under the amendment in 2001.

▪Economic growth and tax relief reconciliation act: explains that reduction of ordinary tax burderns.

▪In bush tax cut and National saving:

under this they have made an finding that reduction in marginal tax rates under legislative act 2002 and then to avoid the position of revenue declining.The Government used static method to evaluate the revenue losess which ever happened.there are many impact like this through which the tax cuts happening and it results in increase in national savings and capital formation.

model used : dynamic model.

b) consumption is based on the revenue losses that setsoff by reducting in government consumption spending that drag on the avoidness of economy.

▪as per the budget tax cut plan 2020, they expressed that there should be a boost consumption and contain the economic slowdown.

▪the government may expect higher consumption after tax cut.

C)Government often issue debt in the form of bond to raise money.under Quantitative easing policy the government can buy back the bond only at the time of financial issues.