Question

Suppose you had been able to set our nation’s economic policies during the recession of 2001. You are a Legislator and you need to select the best Fiscal Policy tool to get the economy out of the current Recessionary Gap. From the list of policy options below identify THREE policies you would vote for and explain why those two will be the most effective at creating jobs or generating spending. Also, identify THREE policies you would vote against and explain why those are not good policy options.

- Cut income taxes by $2,000 for anyone who bought a home.

- Decrease the upper tax bracket rate from 35% to 30%.

- Eliminate the income tax that individuals must pay on stock dividends they receive

- Lower the tax of any business that buys new equipment by 20 % of the cost of that equipment.

- Give unemployed people a training or relocation allowance of $2500 to assist them in their search for a new job.

- Spend an extra $25 billion to rebuild our nation’s highways.

- Provided an additional 26 weeks of unemployment compensation for workers who had been laid off.

-  Decrease the lower tax bracket rate from 15% to 12%.

- Increase the per child tax credit from $600 per child to $1000 per child.

- Reduce the tax people pay on capital gains. Profit they receive when they sell stocks or real estate for more than their original purchase price.

- Eliminate the federal tax on gasoline.

- Decrease the tax rates on Corporate Profits.

Answer 1

Policies to vote for:

• Spend an extra $25 billion to rebuild our national highway,
• Decrease the lower tax bracket rate from 15% to 12%.
• Give unemployment people a training or relocation allowance of $2500 to assist them in their search for a new job.
• Cut taxes on child tax credits from $600 to $1000 per child.  

All of the policies mentioned above will either increase government expenditure or increase the disposable income of the people allowing more income in the hand of people which will encourage them to spend more and increase the aggregate demand. Moreover, it will allow the business firms to invest more at a lower taxes which will also increase the aggregate demand.

Policies to vote against for:

• Decrease the upper tax bracket rate from 35% to 30%. (people in the upper tax bracket spend a lower proportion of their income and spend less, giving them a tax break will only increase the saving and make the situation worse in the country. )
• Reduce the tax people pay on capital gains. The profit they receive when they sell stocks or real estate for more than their original purchase price. (in a time of recession no one will make a profit by selling a real estate its prices are down this more is irrelevant here.)
• Eliminate the income tax that individual must pay on stock dividend they receive (it will only increase speculation in the market and it will not benefit the poor and jobless in the economy but the rich who invest in the stock market)