Question

• The Republicans are preparing to pass major legislation – the Tax Cut and Jobs Act – that they say will boost the growth rate for the U.S. economy from ~ 2 percent to ~4 percent. Republicans claim that the tax cuts will “pay for themselves” because all of that growth will mean higher tax revenue even as tax rates come down. Many economists argue that this is based on flawed “trickle-down” economics that comes from a belief in the Laffer Curve. Write a short essay explain how both sides think about this issue. (Keep your opinion to yourself and just explain the economic logic behind both arguments.)

Answer 1

According to the republican logic, income tax cuts will increase the disposable income of people and this will increase consumption expenditure .Similarly, corporate tax cuts will increase incentives for investment. This increase in consumption and investment due to tax cuts will increase income and growth in the economy. Due to higher growth, the taxes collected by the government will be high even when the tax ratesare low.

This has been criticised by the democrats on the grounds that reduction in tax collection will not be compensated by higher incomes. In fact, due to lower government spending the infrastructure, health and education of the country will suffer. Even though a few people may benefit due to tax cuts, the poor will suffer the most as the government will not intervene in order to alleviate poverty. The benefits of the tax cut will be mostly to the rich, while the poor dependent on subsidies will be penalised. So, the trickle down effect may not work or will be limited in its scope.