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Taxation Policy of US Congress Report

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Updated: Nov 6th, 2021

Introduction

To begin with, there is a strong necessity to mention that the cut of the taxes was mainly aimed at regulating the investment policy and principles. The Business taxes required changes. Moreover, the majority of business players and investors regarded this tax cut package, moving through Congress, as the factor that will be able to reduce the cost of new equipment and capital improvements. The presidential administration undertook a firm step towards the elimination of dividends and for the expansion of some previously enacted business provisions. The fact is that most of the pro-growth decisions and actions performed by the President and his Administration passed entered into action under the Jobs and Growth Tax Relief Reconciliation Act of 2003.

Underlying Concepts

The main concept, which may be used for explaining the rationale of tax reduction package is covered in the notion that the simultaneous boost, and the reduction of taxes has both political and economic consequences: on the one hand tax reduction has political benefits, as voters stay happy with tax reduction, and this decision keeps the politicians in elected office. As for the economic and financial reasons, it should be stated that reducing taxes stimulates the economy by improving the indicators within macroeconomic business cycles. As Pollack (2005) stated in his research: “The net result of these actions is an increase in the federal deficit, or in the highly unlikely event that one exists, the federal surplus decreases. While the tax on dividends was not eliminated, it was greatly reduced, as was the tax on capital gains. Advocates of this tax policy argued at the time that passing the President’s bill would significantly boost business investment and raise the economy’s overall growth rate.”

Graph 1 clearly explains the notion that tax reduction boosts business investments, and the supply-demand curves appear to be changed, in accordance with the tax requirements and price-quantity levels. The effective tax rate increases only in two situations: when taxes are increased, and when production rates are increased. Thus, when taxes are lowered, this stimulates producers to lower the prices and increase the manufacturing rates as well as the quality of the production or services. As it is stated in Sidhu, Whittred (2003): “supporters of reductions in the tax rate on dividend income believed that the resulting boost to equity prices would be enough on its own to substantially increase business activity.

How would the tax cuts be represented by the aggregate expenditure model and the IS curve. Analysis

As for the matters of IS curve, it should be stated that non-residential fixed investments originally presupposes strong control over taxation and the rates of taxes. As business researches reveal, the investment had the strong growth tendency in 2003, thus, this was the reason of investment decrease in the following periods. Thus, the tax reduction was the wise step in order to stimulate investments. According to Gouda and Zaalberg (2005) it should be stated that business stimulation and GDP growth, in relation with IS curves, add to the investment rates growth, and promotes the increase of labor costs: “Business investment now contributes to GDP growth instead of reducing GDP. The upturn in investment contributed to the 8.2 percent GDP growth in the third quarter of 2003. Since the tax cut, business investment has added more to GDP growth than it had at any time since the spring of 2000. Stronger business investment will lead to increased job opportunities for American workers as the demand for labor rises”. Then, if the provisions of the tax policy expire, and the strong importance in cost and capital regulation appears, the business investment growth rate will slow. From this point of view, it should be stated that Congress would have to face the issue of making these changes permanent. On the other hand, there is an essential risk for investment slowdown, which will decrease financial growth and intimidate recovery in the labor market.

Conclusion

Finally, there is a strong necessity to emphasize that the necessity to cut the taxes was originated by faults and misconceptions in investment policy, nevertheless, properly planned and implemented by US Congress. Originally, this caused the stimulation of business investment and increase in production rates. As for the matters of IS curve, the fact is that non-residential fixed investments originally presupposes strong control over taxation and the rates of taxes. Consequently, there is a strong necessity to state, that IS curves are dependent not only on the tax reduction package, but on the tax regulation policy in general.

References

Desai, M. A., & Goolsbee, A. D. (2004). Investment, Overhang and Tax Policy. Brookings Papers on Economic Activity, (2), 285

Gouda, F., & Zaalberg, T. B. (2005). American Visions of the Netherlands East Indies/Indonesia: US Foreign Policy and Indonesian Nationalism, 1920-1949. Amsterdam: Amsterdam University Press.

Pollack, S. D. (2005). The Failure of U.S. Tax Policy: Revenue and Politics. University Park, PA: Pennsylvania State University Press.

Sidhu, B. K., & Whittred, G. (2003). The Role of Political Costs in the Deferred Tax Policy Choice. Australian Journal of Management, 28(1), 63

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