Question

In order to promote economic growth, the government can provide tax incentives. This may encourage the creation of job opportunities. For instance, it is possible giving tax related incentives to new entrants (beginners of new business). On the other hand, unless taxes are collected adequately, it is not possible to run government offices or fund social amenities, or any government operation. How would you reconcile the two seemingly opposing instances. What do you think?

Answer 1

Perhaps due to these seemingly opposing instances that the government has to run a deficit for most of the time. The problem is that while there are quite a few mandatory programs such as Social Security, Medicaid, Medicare, and Unemployment insurance, it has to provide required stimulus to the economy as and when required. On the revenue side, the revenue it collects takes the form of corporate income tax and individual income tax which if reduced, lead the budget towards deficit.

Economic growth can be achieved even with government spending if Keynesian perspective is taken into consideration. The tax incentives are majorlly a supply side policy whereas government spending is a demand-side policy. The government in such a situation, attempts to maintain a balanced budget where spendings are allowed to increase only by the amount of revenue collected. In case there is a deficit, taxes are increased to compensate for the deficit.