Question

The Government of Toan recently announced the approval of a major tax and spending overhaul that aims to (1) reduce the burden on its government by requiring 85% of its population to live in one of three specially designated cities, (2) completely eliminate any and all taxes on corporations for five years, (3) offer a substantial reduction to 0.5% tax rate on capital gains by investors (prior rate was 35%), and (4) elimination of government spending programs such as social security, health care, and disability support.

The country is isolated from other countries, both geo-politically and geographically. With a government budget of $500 million annually, a deficit of $8 trillion, the country of Toan is experiencing devastating inabilities to provide even the basics of services. Infrastructure is crumbling, food and water supply chain is not moving, hospitals are running out of essential medical supplies. No foreign governments are willing to loan or invest in Toan for the foreseeable future. However, Toan’s upper north region is believed to hold trillions of tons of oil, yet the country has not had the investment backing to pursue exploration and certainly does not have the infrastructure.

Toan, a country of 27 million residents (72% is between the ages of 60 and 90 and 28% are under the age of 59). Most of the working age population has a Masters degree or Ph.D. or other specialized education. The law also eliminates the retirement age in its entirety—meaning no one will have the right to retire and no one will receive a pension from the government.

Some think that this major tax overhaul has a lot to do with the recent microbial outbreak of a never-before seen virus where nearly 20% of the 1.5 million population located in the country-side have died. Is the government simply moving forward with this legislation to take the property of the deceased, exclaim a key opponent to the new law.

While the country hopes for widespread economic freedoms available to all residents, some are not convinced. However, supporters boasts “this is good law” because it moves people out of the country and into cities where we can provide more effective and efficient services. Of course, the Constitution for Toan might be impacted negatively, but according to the supporters of the law, this is the only path forward. A key politician recently stated that the government does not plan on providing due process or offering payment for the land that the citizens will forfeit to the government.

Part of the legislation provides for infrastructure improvements and new housing within 10 miles of the city centers. Corporations are said to benefit the most because their research and development expenses will no longer be taxed. Ideally, corporations will increase wages, hire more people, increase productivity, and contribute to the growing deficit of Toan. Further, because many corporations are planning to build on-site housing, the legislation will incentivize workers by offering free or reduced rate housing. Finally, the legislation requires corporations to demonstrate an increase in wages of 40% for every worker, regardless of skill or educational background. Corporations who do not increase wages will be penalized and may face jail time.

Instructions:

In a format of your choice, please provide your insights on the facts above (do not recite the facts entirely) from the perspective of a Law and Economics Consultant. Please also incorporate the following questions and include citations to references, where possible.

Has the country of Toan violated the Rule of Law?

What, if any, type of economic theory would closely match the fact pattern above?

What is meant by the term trickle-down economy?

Does the trickle-down theory work in the above situation, please explain.

Have there been successful trickle-down economies anywhere in the world, please define “successful”?

In an economy where consumer confidence is low, political distrust is high, wages are stagnant, and inflation is looming on the horizon, what is the best economic theory to put into action?

If wages go up (as stated in the fact pattern) will this solve the dilemma of the deficit of Toan? What else is needed?

Is the law that punishes corporations for not raising wages a constitutional law in a capitalist society? (assume that for this question the Country of Toan is a democracy)

Please argue for and against the new law (be sure to provide solid arguments of the “pros” and “cons” of the law.

What happens if the tax overhaul actually stabilizes the government and produces a break-even budget and minimal deficit? Should it be continued?

Is having a low unemployment rate a good or bad thing?

Answer 1

The government of Toan with the announcement of its recently approved Tax and Spending overhaul is planning to reduce its goverment's burgden and planning to shift its 85% of population in one of the three specially designated cities and eliminating the corporation tax entirely for five years and reducing the capital gains tax to 0.5% from 25% earlier and elimination of government speding programs, i.e. social security, health care and disability support.

Toan is a closed economy and does not have any relations with other countries both geopolitically as well as geographically.

its budget is of $500 million annualy and deficit of $ 8 trillion and its food and water chain is not moving and hospitals are running out of essential drugs and no foreign goverment is ready to support its due to its economic condition and it is not able to use huge oil reserve due to absence of fund and it also does not have essential infrastructure.

it has population of 27 million with 72% people between ages of 60-90 years and 28% are under 59 years and its citizens are master degree holders or Phd's or with other specialized degrees and Toan government does not allow any one to retire and does not have any pension benifit and also some people think that this major tax overhaul has to do with recent microbial virus led deaths of 20% of 1.5 million people of country side and oppostion think that it is goverment strategy to acquire the land/properties of these people.

This legislation also provided for infrastructure development in terms of building new houses in 10 miles area of cities and corporations are believed to be benefited out of this tax overhaul because they won't have to pay any taxes and would increase their production and hire new employees and it will contribute towards growth of Toan and simultaneously goverment is asking corporations to increases wages of all employees by 40% irrespective of their skills

But Toan has also violated the rule of law by removing people's social security, health and disability support and forcing 85% of them to live in one of the three cities and it can cause serious problem for the weaker sections of society who cannot afford paid health services and disabled people cannot afford to pay for their treatment.

Trcikle down economic theory is the best example of above type of tax overhaul structure of country called Toan.

Trickle down economy- This is the type of economy where taxes are cut for corporations, wealthy people and also taxes on capital gains, divindens etc are reduced in order to boost economic growth and due to trickle down economy approach corporations, wealthy people's income gets increased and due to this they increase production and hire more workers and due to this tax people's purchasing popwer gets increased and tax base of the economy also gets increased.

Yes Trickle down theory works for country called Toan because Toan has also decreased taxes on capital gains to 0.5% from 25% earlier and stopped the social schemes, i.e. social security, health care, disability support and elimination of retirement age, etc and think that this will give more money to corporations and wealthy people due to reduction in taxes and due to this they will increase production and hire more people and this will reduce unemployment.

Yes USA is the best example of trickle down economic theory and it was done during 1980's by President Ronald Reagan and at that time top tax rates were cut down from 70% to 28% and also corporation tax was reduced from 46% to 40% and federal receipts increased from $ 599 billion to $ 991 billion helped to end the 1980 recession.

Successful- Above tax cuts has helped to successfully end the 1980 receission as well as increase in federal receipted from $ 599 billion to $ 991 billion.

This type of situation can be handled by applying open market operations of purchase of government securities, quantitative easing and inflation control measures.

No if wages go up then same will not help decrease deficit or to make nil of Toan because tax rates are low and actually Toan government won't get enough tax revenue because when people will purchase goods and services from their increased wages only corporations will get benifit in terms of increased sales and revenue but due to taxe rates are low and near to nil it won't help Toan government to reduce/nil its deficit.

No wage law are made under ordinary laws and these are not constitutional laws as per democratic nature of an economy.

Arguments in favour of new law.

1 It will increase income of corporations and wealthy people

2 It will increase production

3 it will increase demand for labour force

Arguments against the new law.

1 It will only increase income of corporations and wealtht people

2 Benifits won't tricke down to weaker sections of the society.

3 It will concentrate wealth in the hand of corporations and wealthy people.

4 It will reduce taxable revenue of the Toan government.

No it should not be continued for a longer period because it will limit government spending and tax revenue and also cocentrate the income in the hands of wealthy and corporations and it will end all social security benefits, i.e. Social Security, health care, disability support, etc.

Having a low unemployment rate is good thing because it shows economy is near the full equilibrium and most of the workforce is gainfully employed.