Question

What the macroeconomic effects of the Tax Cuts and Jobs Act on the US after the cuts of income tax rates (by about 3%) and the corporate tax rate (from 35% to 21%).?

i) Briefly explain the economic rationale behind the tax cuts.

ii) Discuss whether such fiscal policies eventually achieve their goals . Are there any negative macroeconomic effects of such fiscal policies that you can identify?

(You should investigate in detail which macroeconomic variables are affected as well as discuss both the short- and the long-run macroeconomic effects).

Answer 1

1) The economic ratinale behind such tax cuts is to boost the industrial sector and encourage entrepreneurs to invest more. These higher investments create more jobs, which brings more people under tax ambit.

2) Such policies might not achieve their goals. Rich investors might get the tax benefit on investing, and pay less taxes on their earnings. This leads to messed up governemnt finances, and also leads to more inequality.

Recently, Warren Buffett explained to his shareholders that Berkshire Hathaway had increased earnings by $21bn purely due to the tax cuts given by Trump administration.