Question

A reduction in net taxation, , could be carried out different ways, for example, increasing the Earned Income Tax Credit, a transfer to lower-income workers, or decreasing the marginal tax rate for higher-income households. Do you think the form of the reduction matters for its effect on equilibrium GDP?

Answer 1

YES, i do firmly believe that the net taxation reduction in any of the form would have a considerable effect on the equilibrium level of GDP.we know that an economy is in equilibrium when the AS equals AD or in other words Y=C+I.Also we know that the GDP can be calculated in three ways i.e.by income method,by expenditure method and by output method.So any change that has effect on the calculation of GDP by any of the method.If we talk of income method,GDP can be calculated by summing up the incomes of the individuals of any nation.If we talk of expenditure method,GDP can be estimated by the total expenditure incurred by the individuals,by the government and the investment taking place in the economy.Also the total estimated production of goods in the economy is considered in the process of calculating GDP by output method.

i believe that the above net reduction in taxation will impact the above mentioned factors in one or the other way,directly or indirectly.It can effect income,investments,saving or consumption.It can impact the nominal or real GDP.All these can change the level of equilibrium GDP which can be a result of movements along the AS curve or shifts in the consumption and investment curves.Suppose there is an increase in the earned income tax credit,then it would increase the incomes of the people,a transfer to lower middle classes or reduction in the net marginal tax rates would increase the incomes of the people in some or the other way,their purchasing power would be increased,hence they would consume and demand more.Also we have observed that at higher income levels the propensity to save increases,so the savings would increase and this would lead to rise in investment levels.We know that increased investments has a multiplier effect on the income of the people leading to income generation many a times than the investments.All these factors would definitely be involved in the equilibrium GDP leading to changes in this.

As per me,there would be increase in the level of GDP,as a result of above changes and the economy would be leading towards full employment level which would include a shift in the consumption,investments and AD curve.Also there might be movement along the AS curve taking the equilibrium incime level to newer heights.