Current Political Debates

Current Political Debates

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Current Political Debates

IntroductionThere are various issues that are debated in a country to determine the way forward in economic related matters. In all cases, there are people who support a certain view and others who critic it. This is more common in the United States where partisan debate is part of the country governance. This paper will adopt the same form of debate while the selected topic will be evaluated based on critics and advocates positions. The two selected subjects in this case include Tax incentives for saving and increased government spending to fight recession.

Tax Incentives for Saving

The elevation of a healthy economic growth rate has long been a core public policy goal. The two chief groups of incentives used in search of that goal have been structural tax incentives and macroeconomic measures. Now the tax code has different provisions anticipated to encourage investment and saving to enhance growth. According to Galper and Steuerle (n.d.), one of the chief determinants of eventual economic prosperity in a country is its saving rate. When a country contains a higher saving rate, more resources are accessible for investment in new equipment and plants. With reduced saving rates as compared to how the situation was in the last three decades of 20th century, it is considerably important to provoke the saving urge among American citizens. Thus, according to supporters, promoting increase in personal saving in the US is a great policy which has a positive focus on the future economic position of the country. This is said to be of great importance especially to poor households that can only work with tax incentives to be able to spare more to be able to purchase more than basic needs in the future. The savings can be used to accumulate enough cash for college education, to invest in a business or even to increase on the retirement savings as a way of reducing possible financial challenges when out of the job market. The extra savings can also be used to purchase permanent home for the citizens. The tax payers are required to enjoy this by getting relief in various taxations. The arrangement may include elimination of taxation in the retirement plan. Thus, generally increased savings through tax incentives is highly likely to enhance future economic growth in a country.

The idea of offering tax incentives to enhance savings is not supported by all. There are still those who consider it a wrong move that is highly probable to jeopardize the economy of a country in the future. According to critics, the government depends on taxation to fund its budget. This simply implies that the government has a chance of experiencing budget deficiency as it cut on the amount it receives from its citizens through taxation (Chitale, 1973). This may eventually result to borrowing which will not assist in the growth of the economy of a country but results to a negative economic effect. Moreover, the government may adopt dysfunctional taxation reforms measures which fail to enhance savings but maybe promote extra spending among other behaviors. To ensure that this work effectively, the policy makers must consider reforms on taxation aspects that must promote savings rather than increased spending due to more cash availability. According to critics, if the policy makers are unable to ensure this, they end up messing up the economy they anticipated to improve in the future.

Increased Government Spending to Fight Recession

Fiscal policy is an extensive phrase that is used to define policies passed around the expenditure and revenue of the government so as to impact the economy. The government can augment its revenue by adding on taxes or augment its expenditure by using more on programs. Increase in government spending is considered as one of the best way to fight recession. For a government to be able to overcome recession in its economy, the government can reduce taxations and increase its spending. In this case, the government increases its spending as a way of attempting to save the sluggish production outcomes. This is done with the intention of sustaining the country’s activities of production. This consequently creates policies that curbs inflation. The government employs fiscal and monetary policies to increase government spending and hence trying to balance the situation. This eventually results to reduced inflation and thus, the end of recession (Delong & Summers, 2012).

However, the idea of increasing government spending to fight recession is not welcomed by all. There are others who consider it a wrong move that can easily jeopardize the economy even further. According to critics, individuals tend to save more during recession due to decline of confidence on the future of the economy. Normally people anticipate losing jobs and hence they tend to take measures to ensure that they are not forced to borrow to survive. This move worsens the financial situation of a country due to further decline in consumption as people focus more on saving. Moreover, the savings interest rates appear to go down during this time as the central bank makes an effort to stimulate the economy. The government will as well be tempted to the employment of expansionary fiscal policy. Expansionary fiscal policies are normally put in place in recession periods since they try to raise economic demand, and consequently, augment economic output that is reduced in times of financial crisis. This expansionary fiscal policy entails rising government expenditure or lowering taxes (The Heritage Foundation, 2005).

Basically, government revenue is founded on taxes collected. When the taxes gathered are more than the government’s spending, there is surplus in the government accounts. In case government spending is equal to taxes, the government experiences a balanced budget. However, when spending is beyond the taxes a state of deficit is experience. Thus, the move of increasing spending which is definitely unplanned since it is initiated by the financial situation of a country results to budget deficit and hence, increase in the government borrowing, as a result of creation of budget deficit due to increased spending. This means that the expansionary fiscal policy that may involve tax cutting and augmentation of government spending might fail to produce the anticipated outcome in the long run. The US authorities mostly try both lower taxes and lower interest rates. However this also creates an issue since with reduced interest rates, further dollar devaluation against other powerful currencies in the world is witnessed.

References

Chitale, M. P. (1973). Tax incentives for saving and investment. Economic and Political Weekly, 8(11), 567-569.

Delong, J. B., & Summers, L. H. (2012). Fiscal policy in a depressed economy. Brookings Paper on Economic Activity, 1, 233-297

Galper, H., & Steuerle, E. (n.d.). Tax incentives for saving. Retrieved from < https://www.irs.gov/pub/irs-soi/taxincesa.pdf >

The Heritage Foundation. (2005, 15th March). The Impact of government spending on economic growth. Retrieved from < http://www.heritage.org/budget-and-spending/report/the-impact-government-spending-economic-growth >