Question

6) Each year since winning control of the House of Representatives in the 2010 election, Conservative wing of Republicans have argued that we need to immediately initiate sharp reductions in government spending and entitlement programs and rapidly move towards a balanced budget, (although they have never actually produced a budget proposal in which tax revenues would match government spending plus entitlement transfers). Many Democrats, while arguing that tax rate increases on high income earners need to be part of the any deficit reduction program, have agreed that we need to initiate budget deficit reduction now. However, under the current Trump Administration, the tax reform implemented in 2018 was just the reverse of what democratic party views on taxes. Citizens for Tax Justice (CTJ) have made an estimate of how much these tax reform approved by by the GOP led Congress would impact the existing budget deficit crisis already. According to their estimate, this reform would yield tax revenues of only $1.1 trillion. The Office of Management and Budget (OMB) estimated that the federal government would raise an estimated $2.5 trillion and spend $5 trillion in 2018. Another estimate by independent research organizations and government agencies predict that the federal budget deficit might increase by $1 trillion in 2018-2019 budget year. Given this reality, would result which of the following outcomes?

A) What is the argument against attempting to balance the Federal Government budget rapidly at the present time via either deep cuts in Federal Government spending or sharp increases in federal income tax rates? 4pts

B) Does this argument imply that budget deficits don’t matter in the long run? If not, why might the impact of large deficits predicted in the long run under current tax and spending programs be different than the impact today? Explain. 4pts

Answer 1

Estimated budget deficit for 2020 :-

The estimated federal budget deficit for fiscal year 2020 is $1.10 trillion . This deficit is estimated to occur because the U.S. government spending of $ 4.75 trillion is higher than its revenue of $ 3.65 trillion .

Reasons for current budget deficit :-

1) The 9/11 attacks added a $2.4 trillion debt since 2001 against war on terror and increased military spending .

2) Revenues from corporate tax cuts are lost .

3) Mandatory spending on social services .

Arguments against tax cuts :-

The Trumph tax cuts will reduce revenue due to reduction in personal income tax rate , corporate taxes and small business taxes . These tax cuts total to $1.5 trillion over next 10 years .

Arguments against government spending :-

Government spending includes elements on mandatory spending such as spending on Social Security Trust Fund . Another major sector of spending that does not fetch any revenue in return is free Medicare services to disabled and old.

These welfare programs including housing and unemployment benefits are a burden on government which demands spending , however do not fetch anything in return .

Long term implications of budget deficit :-

1) If the Debt to GDP ratio exceeds , it slowers down the company's economic growth.

2) Excessive debt causes concern of its compounded interests and problems of payback.

3) Excessive deficit spending creates a boom and bust cycle leading to recession.