Question

Donald Trump has proposed a tax plan that would, barring amazing and improbable levels of economic growth, dramatically reduce federal tax revenues. Assess what impact such a tax plan would have if it were implemented under three different scenarios: (A) federal spending stays unchanged and the additional revenue shortfall is made up through government borrowing (B) federal spending stays unchanged and the additional revenue shortfall is made up through printing green pieces of paper, (C) federal spending is drastically cut to not only match the reduction in tax revenue but even so far as to bring the budget into long term balance (i.e. to still permit a small countercyclical budget due to the nature of business cycles).

Use graphs when answering.

Answer 1

Solution A

This proposed option is good enough as government spending remains same which will offset the tax cut and revenue shortfall. However this will add on government debt which is another issue of borrowing.

Solution B

Printing green pieces of paper will cause excess money supply an dlead inflation. And already taxcuts in system will aggravat it. Keeping government spending constant is gokd but not in long term.

Solution C

This is most viable option as it reduces government debt and nullifies shortfall of revenue. However its noted that real GDP willnot change as taxcut is neutralized by government spending.