Question

Will you provide an explanation of how the Tax Cuts and Job Act (TCJA) impacted the economy through aggregate demand and aggregate supply analysis. and give examples for personal and corporate (like payroll, Medicare, etc.)

Answer 1

The tax cuts and jobs act was introduced in 2017.This will stimulate the economy in the near term The economic effect of this act was that in the short run tax cuts can raise GDP by increasing aggregate demand.When economy is close to full employment,the impact on output of increased demand is small.Increased demand will lead to increased inflation and the Fed will have to interfere and increase interest rate.In the long run tax cuts will increase potential GDP, because there will be more incentive to work,save and also invest.As a result the productive capacity of the economy will rise.These supply side effects will bring economic growth quickly in the short and medium term and output will increase in the long run in a permanent manner. Eg TCJA will reduce the penalty of those who do not take health insurance coverage to zero.This will reduce the budget deficit of the Fed. The reduced cost of premium for health insurance and medicaid benefits , will be more than the amount that the country will lose due to zero penalty.