Introduction
Fiscal policy is one of the main methods of federal and state intervention in the economy aimed at reducing fluctuations in business cycles and ensuring a stable economic system in the short term. The main instruments of fiscal policy are the revenues and expenditures of the state budget, which are taxes and government spending. As the US economy is experiencing expansion, there is much debate about what should be implemented in order to stimulate economic growth and prevent the next financial crisis from happening. Currently, there is a dispute about ways of reducing the federal debt, such as massive US tax cuts and decreasing government spending. In the given essay, the importance of increasing federal investing and raising revenue by cutting tax exemptions are discussed.
Main body
It was not until the Great Depression that the US government used laissez-faire economic policy, which means that politicians did not interfere in a free market economy. Franklin D. Roosevelt was the first to use fiscal policy, in particular, government spending, to end the Great Depression by stimulating consumer demand. Since the Great Recession in 2007-2009, total government spending was considered abnormal due to instability and slow growth; government debt increased substantially and accounted for a large part of the gross domestic product (GDP).
Currently, government spending is going to be boosted even more. The main problem the US economy faces nowadays is big federal debt. If it constitutes more than one-third of the real GDP, the financial crisis may happen. Therefore, current suggestions in fiscal policy are aimed at reducing the debt-to-GDP ratio.
The common fiscal policy suggestion is increasing federal investments in research and education in order to create new jobs in cutting-edge fields. One may note that this is a feasible recommendation, as currently there are many part-time workers who would prefer full-time work.1 Also, investing in education will enable more students from low- and middle-income families to pursue higher education.2 Of course, it is necessary to increase the return on government spending. The tools for that may include conducting cost-beneficial analysis to estimate the efficiency of investment and save costs on initiatives with unclear perspectives.
However, some may argue that increasing government spending will lead to an increase in federal debt.3 From this perspective, spending cuts should be considered as a powerful tool that could strengthen the US economy by shifting resources to more productive private activities. On the one hand, one may note that this may spur growth and eliminate the US deficit. On the other hand, however, cutting costs on federal spending may be viewed as a bad strategy that will reduce potential output. Considerably low-interest rates also speak to the increase in federal costs. Therefore, it is possible to state that increasing government costs by the US government may be beneficial to the economy.
Another policy suggestion concerns raising tax revenues by taxing carbon emissions and reducing tax expenditures. One may note that these political implementations may effectively sustain the US budget for several years and thus promote the reduction of federal debt. By and large, raising tax revenues has always been considered as the key tool for the government in obtaining major profit. As there are many factories with a high level of untaxed carbon emissions polluting the environment, the government may lower harmful releases and get revenue. This suggestion was supported by a Republican Carlos Curbelo who introduced a billing in order to tax carbon.4 Even though pricing carbon pollution has not yet been implemented, it is a promising policy that may have great outcomes.
Speaking of tax exemptions, which are exclusions, deductions, and deferrals, they account for a reduced taxable income of a payer and thus a reduced revenue obtained by the government. However, such an implementation in fiscal policy is not supported by Donald Trump who passed Republican tax reform legislation, which is the biggest corporate tax cut in the US. The argument is that cutting corporate tax will lead to more business investment and the creation of new jobs.
However, currently, there is no evidence of considerable positive outcomes of such a policy. While profits of organizations are growing and being spent on share buybacks and mergers and acquisitions activities, workers are not getting paid more. Apart from that, the reduction of corporate tax revenue may be expected to happen. One may also note that tax cuts have a little positive impact on American households, contrary to private companies. Therefore, the tax cut plan is aimed at providing private businesses with benefits, rather than the governmental budget.
Conclusion
To sum up, fiscal policy refers to the use of government spending and tax policies in order to promote the economic growth of the US. Even though currently the US economy is experiencing expansion, there is a major concern regarding the growing federal debt. In the given research paper, current fiscal policy trends have been discussed. In particular, they include increasing government investing and raising tax revenues by taxing carbon emissions and reducing tax expenditures.
Works Cited
Amadeo, Kimberly. “US Economic Outlook for 2018 and Beyond.” The Balance Small Business, The Balance. 2018.
Edwards, Chris. “A Plan to Cut Federal Government Spending.” Downsizing the Federal Government, Downsizing the Federal Government, 2017.
Elmendorf, Douglas. “Recommendations for Federal Fiscal Policy.” Harvard Kennedy School. 2016.
Milman, Oliver. “Republican Lawmaker Pitches Carbon Tax in Defiance of Party Stance.” The Guardian, Guardian News and Media, 2018.
Annotated Bibliography
Amadeo, Kimberly. “US Economic Outlook for 2018 and Beyond.” The Balance Small Business, The Balance. 2018. Web.
The author critically overviews the current state of the US economy based on the key indicators.
Edwards, Chris. “A Plan to Cut Federal Government Spending.” Downsizing the Federal Government, Downsizing the Federal Government, 2017. Web.
The author analyses and summarizes the importance of reducing federal government spending and discusses benefits of such a solution.
Elmendorf, Douglas. “Recommendations for Federal Fiscal Policy.” Harvard Kennedy School. 2016. Web.
The author gives several recommendations for Federal Fiscal Policy that are aimed at reducing federal debt.
Milman, Oliver. “Republican Lawmaker Pitches Carbon Tax in Defiance of Party Stance.” The Guardian, Guardian News and Media, 2018. Web.
The author informs about a representative Carlos Curbelo who proposed a carbon tax.
Footnotes
- See Amadeo for additional information on the topic.
- See Elmendorf for additional information on the topic.
- See Edwards for additional information on the topic.
- See Milman for additional information on the topic.