Question

What are the opportunity costs of reducing expenditures (such as on education and social services programs), compared to the option of raising taxes? Why?

Explain what you think are the rational choices in such a situation, and what other options should be considered and why.

Answer 1

When tax cuts are granted the governments expenditure on government provided facilities like education, social service, post office service, non-toll roads, public parks.. etc has to be slashed. The opportunity costs due to the tax cuts are pleasure people get from visiting a park, good education, and other benefits that the public are denied due to the lack of expenditure.

By tax cuts, we can let the market find the optimal solution to this. If people are given tax cuts they will be able to afford a decent education by themselves without government's help. In a similar way if all the in a locality felt the need for a park they could easily eliminate the middlemen i.e. the government and contribute from the tax exemptions they got. A park or education 'owned' in this way would be valued and handled more efficiently by the people who pay for them unlike the public owned and provided services which usually are not as much efficient in execution. This is to say that a park owned by the locality would be cared for rather than if being owned by a government.

There is another option to doing this as well.

Depending upon the situation the government has to call for tax cuts or tax raise. The government can also take up the responsibility of providing few basic amenities to the public like education, health service, good roads, parks for kids and the elderly. The money collected from the public must be in an efficient way used to serve the public. This does have a genuine threat to the public services and goods being misused and under cared for.