Question

Explain the intended effect of extending tax cuts to middle-class Americans but not for high-income families.

Draw a graph to illustrate the intended effect.

Explain why the effect of tax cuts depends on who receives them.

Answer 1

                        There are multiple effects of tax cuts and it depends on who receives the same in order to specify the effect of those in the economy of a state. The given case talks about the extension of tax cuts to the middle class group in America. Lowering the tax rate can result in raising the spending power in the economy which can lead to increase in the aggregate demand in the economy and would lead to higher economic growth. When we consider the supply side economics, it can be seen that the cuts in the income tax may increase the incentive to work which would lead to higher productivity in the economy. The take-home pay of the middle class workers would be increased which would be a boosting factor for the economic development in the state. The production activities in the economy can be boosted and the working class would be made more attractive to the production scale which would be advantageous for the economy.

                        While considering the history of taxation policies in America, it is seen that the top earning population gains the maximum out of the tax cuts and thus would result in a deficit to the income for the budgetary support. We can see that a reduction in the tax for the higher income families would, in a slow pace lead to the destruction of the economy as the administration would be left with lesser income from such population and thus may result in lowering the economic potential of the domestic economy which in more time may lead to lowering the international exchanges of the state.

                        Thus, while considering the impacts of the taxation cuts on the two sectors of population, it can be seen that the impact of tax cut on the economy would depend on the section of the society that claims the benefits. Thus, while the tax-cuts in the middle income group would be beneficial for the economic development, it can be seen that such a taxation cut may result in disturbing the economic trend if such cuts are introduced for the higher earning groups.