The Beneficial and Detrimental Effects of Tax Cut on Long-run Growth
The term paper picks a topic, critically reviews the literature, and clearly lays out arguments on both sides of the debate.The final version of the paper is due by the last class meeting. Learning objectives: Find, select, and organize a literature.Summarize arguments concisely, but in such a way that the reader understands how each argument is supported.Practice scientific writing.TimelineWe will devote part of a class to questions such as: 1. What makes a good topic? 2. How to find literature? 3. How to summarize opposing arguments so that the reader can understand how each argument is supported.
Timeline:
By week 4, each student picks a topic. By week 6, each student has collected at least 5 references that represent both sides of the debate at an appropriate level. By the week after the midterm, each student submits an outline of the main arguments.As you write / develop your argument, you should get in touch with me periodically to make sure everything is on track (and to clarify questions).
Please provide all files in pdf format (not MS Word). I do not need hardcopies.
Expectations The paper should demonstrate understanding of the literaturelay out arguments on both sides of a debate.give the reader an idea about how the cited studies reached their conclusionsgive an idea of magnitudes. Macro questions are often about quantifying tradeoffs. For example, it is obvious that more progressive taxes reduce inequality. But is this a big or small effect? I do not expect innovation, modeling, theory, or original data work.that you read academic journal articles (though you should try).that you reach a conclusion. If the experts disagree, I don't expect you to figure it out.There is no prescribed length. Obviously, you don't want to hand in 2 pages.
Examples of well-written term papers: Negative interest rates, Racial inequality. These were done during a semester when the students spent less time on their papers. I expect more depth than these.
Notes on WritingCite your sources.
When you make a claim, back it up. Use scientific citation styles. In the text: "Smith (2020) says Blah." In the bibliography: "Smith, Martin (2020). The Title. Journal of Economic Perspectives 3(4): 15-20". Nice words come last.
First decide what you want to write. Outline that. When you are happy with the substance, fill in the words.
Visual structure.
There should be (sub-)headings that let the reader see at a glance how the document is structured. Explain how conclusions are reached.
Saying "A study by X showed that increasing top marginal taxes reduce income inequality by Y" is not all that informative by itself. How was that conclusion reached? Why do other studies disagree? Weave a narrative. You don't want a laundry list of "A says X, B says Y, ...". Instead, it is better to have:
"The main disagreements are about X and Y. On X, A says XA and backs it up as follows ... But B says XB and supports it as follows ..."
Related: Rather than separately summarizing the arguments pro and con, it is usually better to summarize how both sides view each argument.
Example: Do minimum wages cost a lot of jobs?
A con argument (no pun intended) may be: we don't see evidence in cities that have increased minimum wages.Those who hold the pro view may counter: there is a selection problem. Only cities where employment effects are small raise minimum wages.What Makes a Good Topic?We are looking for a question that is under active debate.
The topic needs to be fairly narrow.
Examples:
Too broad: Why did income inequality rise over time?Better: Focus on one cause, such as international trade. Perhaps even narrow it to trade with China.Too broad: What are the implications of a flat tax? Better: Would a flat tax substantially increase income inequality?Assignment:
Think about a potential topic that interests you (not listed here).We will debate its merits and look for literature.Possible Topics (but You May Choose Your Own)Below I list potential topics. They are generally phrased more broadly than what you would choose for a term paper.
Growth:Do we need patent protection for innovation to occur?Why has manufacturing declined in the U.S. (international trade, technical change, ...)?Do certain policies stimulate long-run growth? Examples include tax cuts, deregulation, free trade agreements.Business cycles:Why was wage growth so slow during the recovery after the Great Recession?Fiscal policy:What are the limits to government debt? Will interest rates remain low for a long time?Do tax cuts pay for themselves?Are taxes the reason that Europeans work so much less than Americans?Monetary policy:Should the Fed target asset prices?Can the Fed pursue unconventional monetary policies (QE, asset purchases) forever? What are the limits?What will happen when the Fed starts to unwind its QE asset positions?Does QE generate inflation?Inequality:Effects of taxing the rich. Need to focus on specific policies (e.g. progressive income taxes) and specific outcomes (e.g. income distribution). Causes of rising income inequality. Potential policy responses.Labor market polarization: what will happen when more and more jobs get mechanized?Why has the labor share declined over time?What would happen if we taxed bequests? Or wealth? Focus on specific outcomes.Would a minimum wage cause lots of unemployment?Does income support to poor households discourage employment?Implications of government job guaranteesOpen economy:Are exchange rate devaluations expansionary?Why are we running a trade deficit with China?Other: Why did the U.S. saving rate decline over time? Finding Source MaterialAcademic journal articles are generally hard to read. Feel free to look, though, and you will get an idea what professional economists actually do.
More accessible references include:
World Bank or IMF publications The Journal of Economic PerspectivesBrookings InstitutionFederal Reserve Banks publish articles aimed at explaining research to the general public. Examples are the Economic Letters of the San Francisco Fed.the Economist, NY Times, or Wall Street Journal are fine, but you also want to dig deeperI maintain a short list.
I would generally avoid political sources (Heritage Foundation; Congress; Cato Institute).
Made with Material for MkDocs
Impact of Tax Cut on Long-run Growth
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Impact of Tax Cut on Long-run Growth
Generally, taxes affect the economic growth and development of a country. Economists, organizations, and governments usually develop strategies and policies to reduce the dire effects of taxes while promoting economic growth. In the long run, the economic potential is determined majorly by supply. Tax incentive policies usually focus on reducing the adverse effects of taxation. The impact of tax cut policies is thus felt both in the short and long-run economic growth. The discussion topic of the paper is the impact of tax cuts on long-run growth. Tax cuts have contributed significantly to the economic development of different countries. Many economies, including the U.S., China, and the U.K., have adopted tax cut policies leading to enhanced economic growth. The effects of tax cut policies will be discussed from literature by various economists and governments. The beneficial and detrimental effects of tax cuts will be elaborated on as per the opinions of those economists. The paper debates the impact of tax cuts on long-run growth based on literature from different economists and bodies.
Pros of Tax Cut
Tax reform, according to economists Gale and Samwick, has a favorable effect on economic growth. The following is a detailed analysis of the implications of the tax cut on income tax rates: Reduced income taxes have both substitution and income effects on individuals and businesses behavior. To put it another way, lower tax rates encourage people to work, save, and invest, which boosts the economy's size. Increased after-tax gains induce extra effort, saving, and investment through substitution effects (Gale & Samwick, 2014). Pure rate cuts reduce the value of current tax inefficiencies and promote a shift in the balance of economic output, even if the quantity of economic activity does not change. It is also feasible that lower interest rates will make it less necessary to work, save, or invest.
According to Gale & Samwick (2014), raising the marginal return to labor by reducing taxes has the substitution effect of increasing employment. Tax subsidies are reduced in value, which could change the balance of economic activity. As a result, the income effect reduces labor supply by raising a household's net income throughout each level of employment. The overall impact on the labor market is unclear. Savings and other activities are also affected by lower tax rates. Since the economic cost increases with the square of its tax rate, efficiency gains brought by the tax cuts are more significant (Gale & Samwick, 2014). This is effective where taxes are already high.
It's a widely held belief that lowering tax rates will have a positive impact on economic growth. Taxes should be lowered in order to increase the amount of disposable money that people have available to spend on products and services. If taxes are reduced as a stimulus, this is an argument from the consumer side. As a result, the economy's productive capacity would expand as a result of lower tax rates, causing long-run economic growth (Tax Policy Center, 2020). The aggregate demand curve is pushed outward by reducing taxes because consumers have more money to spend. Boosting capital formation is a primary goal of supply-side tax reduction. For example, a lower cost of items can lead to a higher demand for such things if the cuts are successful, as lower prices tend to increase the availability of those commodities.
The Tax Policy Center (2020) also highlights the long-run benefits of tax cuts of encouraging work, innovation, saving, and investment opportunities. People are induced to engage more in work when reductions in tax on salaries and wages are made. The labor force can expand to accommodate more low-skilled workers when the income tax credit is extended. The rate of savings increases where low tax is imposed on returns to assets components such as dividends and interest (Tax Policy Center, 2020).
Domestic investments also increase due to tax reductions on business income, thus enhancing long-run economic growth. After-tax rewards on investments will increase as a result of the tax cut policies implemented. The U.S. government enacted the Tax Cuts and Jobs Act of 2017 reforms to reduce tax rates, thus enhancing job opportunities and net benefits for corporations in the region. Most of the U.S. tax cuts are, however, approximated to expire in 2025. According to the Tax Policy Center, an increase in GDP and employment levels stimulates the economy, a financial impact of tax cuts. According to the Joint Committee on Taxation, tax reductions would increase personal consumption, thereby leading to the long-run growth of GDP and the economy.
Cons of Tax Cut
Although tax cuts have a favorable implication on long-run economic growth, there is strong opposition to tax-cut policies, highlighting the detrimental impact on development. According to the Tax Policy Center, tax cuts increase budget deficits, leading to slow long-run growth in the economy. Tax Policy Center argues that public spending can be financed by channeling private capital investment or borrowing from overseas investors in a healthy economy. In other words, public debt either reduces future productive capacity by crowding out private investment or reduces the share of future revenue from invested capital that goes to U.S. citizens (Tax Policy Center, 2020). There is a downside to deficits, regardless of how they are incurred.
According to economist Heimberger (2021), the effect of tax cuts on long-run economic grow...