Taxes in United States

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Taxes in the United States
Introduction
Economics studies the whole economy (macroeconomics) and the small sectors of the economy (microeconomics). Microeconomics studies the interaction of demand and supply in different markets for services and goods. Macroeconomics involves studying the whole economy while analyzing economic figures like gross domestic product (GDP), employment, and inflation. Furthermore, macroeconomics also covers the government policies on expenditures and taxes to determine how these activities affect each economic indicator. Macroeconomics studies the whole economy of a nation by analyzing the interaction between all markets to influence the whole economy referred to as aggregate variables. The government plays a major role in macroeconomics through the implementation of Income, expenditure, and tax policies that greatly affect the overall growth of the economy by affecting economic indicators such as inflation, employment, and the GDP. Study of macroeconomics can extend into the international market due to the impact of shared variables regarding trade, capital flows, and investment (Andolfatto 20-28).
The impact of macroeconomic variables on an economy trickles down to every consumer. The paper presents a description of Income-Expenditure approach and its application on the impact of taxes in the United States on Economic Growth. The financing and structure of a tax charge are critical in the determination of economic growth.

Cutting tax rates may motivate work, invest, and save; however if the tax relief isn’t financed by immediate cut on expenditure; it will ultimately lead to deficit in the federal budget, which in the long-run will lower the national savings and increase the interest rate. The net impact of tax cuts in not clear, however, economic estimates suggest that it can be minimal or negative. The paper focuses on the effect of changes on income tax and the overall influence on the economic growth. The two types of tax changes discussed in the paper include; lowering of the tax on income of individuals and tax reforms on income tax in the United States.
Income-Expenditure Approach
The gross domestic product (GDP) measures the productivity of an economy over a specified period. GDP per capita measures productivity per household or individual. The GDP of a country is important because it influences the living standards of every citizen mostly on the productivity of an economy and final services and goods. In an economy where more clothes, food, shelter, and machinery among other products and services are produced, the residents are more likely to have better living standards than people residing in economies with low productivity. GDP measures the value of final goods, intermediate goods used in the production of other products are not included in the final measure of GDP. The computation of GDP is based on the premise that the cost of production is reflected in the market value of a product. When measuring the GDP, the value of capital depreciation during the production process is subtracted from the gross domestic product to come up with the Net Domestic Product. The term domestic refers to all production units both capital and people within a nation’s border. Furthermore, the economy of a country can also be described using all production units owned by a country, whether within its borders or not. The production value of an economy defined in these two aspects is referred to as Gross National Product (GNP), it measures the value of all final products and services produced by citizens and their investment regarding capital over a period (Andolfatto 20-28).
The Gross Domestic Product (GDP) equals both Gross Domestic Income (GDI) and Gross Domestic Expenditure (GDE). Therefore it can also be concluded that GDE=GDI. The Income-Expenditure theory explains that the total expenditure is equal to the aggregate income, each of which represents the value of total production of a country. Every output production must be faced; this is classified in the inventory as investment expenditure by the buyer and as income by the seller. Thus, since expenditure by one person is an income or earning to someone else, the aggregate expenditure must be equal to the aggregate earnings. The identity GDI=GDE is known as the income-expenditure approach. If Y denotes Gross Domestic Income (GDI); then the income-expenditure approach is expressed as:
Y=C+I+G+X-M
The GDP always fluctuates over time, even in economies that are relatively stable, the Gross Domestic Product (GDP) always fluctuates, and this is mainly due to the consumer’s need to continuously improve their living standards. The continuous fluctuations in the GDP of economies are mainly measured regarding growth rate because most economies tend to rise over a period of time. If the growth rate of an economy is negative for six months, the economy is described to be in a recession like the Great Depression that hit America from1929 to 1939. The fluctuation in GDP is caused by the reaction of market players to the different economic shocks affecting the economy (Andolfatto 20-28).
The fluctuations inflicted in the economy arise due to a sudden change in desired expenditure from consumers, businesses, the government and the international market. The Keynesian theory of economics is used to explain the difference in the GDP of a country over time. The Keynesian school of thought is also referred to as the conventional theory due to its wide application on macroeconomics. The Keynesian theory is used to explain the total expenditure in the economy and how it affects the inflation and aggregate output. According to this school of thought, the total demand is affected by several economic decisions by both the private and public sectors of the economy. According to Keynesian school of thought, the long run trend of growth rate in real per capita GDP is regarded as more or less stagnant. Keynesian believes that the variations in GDP cost by the different economic shocks affecting the aggregate demand and that any given shock affects economic indicators like inflation, employment, and GDP.
The Effect of Changes in Income Tax on Economic Growth
The optimal tax system theory requires that a tax regime should maximize the social welfare within a set of economic constraints. Over the past years, the United States government has continuously attempted to mitigate recession by increasing expenditure and lowering income taxes. In keeping up with the Keynesian model, the federal state has made an attempt to make sure that the economy is stable by inducing more expenditure by the public into the economy to cover for the drop in private demand. Even though the state has invested some efforts towards stabilizing the economy through fiscal policies, many of its long term tax policies have reversed their effort. On the flipside, these tax policies are immanently causing economic instability by causing an increase in aggregate demand in favourable years and causing a drop in aggregate demand during bad years. Therefore, even as Americans have seen an inflow of federal dollars into the market, Americans have not been able to recognize the strong underflow that occurs due to tax laws that silently draw dollars out of the economy. In summary, most of America tax codes clash with their fiscal policies and there is no correction effort being made (Gale and Samwick 4-16).
The reason for neglecting this economic policy clash is because; when viewing financial stability, tax policies are not considered. Each individual has made the assumption that tax policies are simple, efficient, and ensures equity. Contemporary debates on tax policies disregard the issue of economic stability. Tax scholars are also hostile to the inclusion of economic stability in tax policy forums. In the aftermath of the great depression, it was agreed that tax policies had a role in stabilization of the economy, giving the Federal government a crucial weapon against recession. Between 1983-2007, a period is known as “Great Moderation” for progressive economic growth occurred in most nations, but economic stability fell from grace. Along this period, a consensus came up that fiscal policy is not fit for stabilizing the economy. Monetary policies ensured economic stability without the influence of fiscal policies. Therefore, there isn’t a need for very many tax policies that are ineffective. The onset of a painful and prolonged Great Recession in 2007 marked the end of the great moderation. The recession also resulted in an end of the academic consensus favouring monetary policies as the tools for ascertaining economic stability. Economic stability also significantly motivated the tax cut policies implemented in 2008. 2009, and 2010. Most tax law experts were in support of these tax reliefs for benefits of stabilizing the economy (Listokin 45-49).
Even though economic stability has regained its place in the objectives of tax regimes; most people still do not understand the link between tax regimes and economic stability. The policy makers tend to give tax reliefs in times of depression and increase tax levels when the economy is growing when stabilizing the economy. However, the tax policy makers forget to look at the whole United States tax regime enhances economic stability. The tax provision laws have been identified as simplicity, efficiency, and equity, but the impact of these tax policies on economic stability haven’t been examined and therefore not easily identifiable. For example, the removal of health benefits provided by the employer from tax income gives the government an effective subsidy for Medicare insurance as compared to other types of employee consumption. The exclusion will amount to $ 1 trillion along five financial years from 2012-2016, making it slightly lower than the package enacted by President Obama under the American Recovery and Reinvestment Act (ARRA), which costl higher than $ 800 billion. Another option would be that the state subsidizes Medicare directly (Mankiw, Weinzierl and Yagan 4-34).
If the State partly or fully paid every person’s health insurance cost, then it is very unlikely that it would be faced with the option of increasing or lowering tax levies when the economy experiences shocks. The exclusion of income tax from health insurance provided by the employer exerts pressure on the economy; thus forcing the government to adjust tax subsidies each time there is economic instability. The healthcare subsidy is given by the exclusion only has the impact on people employed. When the economy is under shock that causes a prompt drop in confidence, employment drops. With a drop in employment rates, few employees benefit from the exclusion of Medicare insurance provided by the employer from taxation. Therefore, an effective government relief on Medicare insurance drops and thus decreasing aggregate healthcare demand and the demand for other products as well. The size of government tax relief on health insurance increases in stable economic times and drops during the recession. Therefore, a government subsidy provided by the government directly to people is preferable to expenditure on healthcare taxes, holding other factors constant. The expenditure has a destabilizing effect on the economy while, on the other hand, direct subsidies do not have similar economic impact making it desirable for economic growth (Poulson and Kaplan 2-19).
Conclusion
Despite the fact that Gale and Samwick states that a favourable tax policy should maximize social welfare, I believe that this has not been the case with the United States tax regime. The evidence presented proves without a shred of doubt that tax rates and policies have an impact on economic choices, obviously, irrespective of previous economic events, tax rates ultimately expands the economy. Even though cuts on tax raise increases the propensity to work, invest, and save; I agree that they can also increase net income from employment, which lowers the need to work, invest and save by increasing the purchasing power of the consumer. The first effect of the tax cut is that it motivates the desire to work through substitution effect, on the flipside, tax reliefs also lower the need to work through income effects. Furthermore, if tax cuts are not financed through reduced spending, tax reliefs will lead to increased federal borrowing, which in the long run stalls economic growth. Tax cuts that are not financed by reduced expenditure will have little or no positive impact on economic growth and stability. On the other hand, income tax reliefs that are financed by the decrease in unnecessary expenditure will increase the aggregate output.
Work Cited
Andolfatto, David. Macroeconomic Theory and Policy. 1st ed. 2005. Web. 24 Nov. 2016.
Gale, William G. and Andrew A. Samwick. Effects of Income Tax Changes on Economic Growth. 1st ed. 2014. Web. 24 Nov. 2016.
Listokin, Yair. Equity, Efficiency, and Stability: The Importance of Macroeconomics for Evaluating Income Tax Policy. 1st ed. 2012. Web. 24 Nov. 2016.
Mankiw, N. Gregory, Matthew Weinzierl, and Danny Yagan. Optimal Taxation in Theory and Practice. 1st ed. Web. 24 Nov. 2016.
Poulson, Barry W. and Jules Gordon Kaplan. State Income Taxes and Economic Growth. 1st ed. Web. 24 Nov. 2016.