In your opinion, do you believe annual tax cuts will bolster economic growth and tax revenues for the U.S. economy? Why or Why not?
Fiscal policy undertaken by Bush office is more then doubtful. As projected by Jonathan Weisman (2006), the current budget deficit of $260 billion will rise to $286 billion in 2007 and will reach $328 billion by 2010. Considering external economic factors such war in Iraq and the consequences of hurricane Katrina that will be lasting up until 2016, federal budget is too weak to cover tax cuts.
When considering the issue from the economic viewpoint, tax cuts will not be fruitful. This fiscal policy is usually undertaken in situations when economy is in depression or stagnation to increase consumer spending and in such way stimulate economic growth. However, under the present settings, the fact that tax cuts will lead to an increase in consumer spending is doubtful.
The reason for this is rooted in a relative stability of economy right now and in the war on Iraq. As consumer preferences are influenced by externalities such as war, people tend to save more when the political situation is unstable. Consequently, tax cuts might result in increased consumption; however, the policy is inefficient because government would have to decrease taxes significantly enough to make up for consumer fears of war consequences. Therefore, somewhat increasing economic growth will cost too much to economy overall.
Fiscal policy undertaken by Bush office would be more effective if president was determined to end the war in Iraq. As the war itself contributes to budget deficit, it is an economic burden, it also decreases consumption rates. Even if right now the direct consequences are invisible, in the long run US residents will have to make up for the current budget deficit. Considering the fact that the generation of baby boomers is about to retire, more money will be needed to pay out pensions. I would say that the current US fiscal policy is short sighted and inefficient.
Weisman, J. (August 18, 2006). Tax Receipts Reduce 2006 Deficit Forecast, Washington Post, D01.