A principal point of contention between Keynesian and supply-side proponents con

Question

A principal point of contention between Keynesian and supply-side proponents concerns the proper function of tax reductions. According to the Keynesians, tax-cut money should be used by consumers to purchase goods and services thereby stimulating output, employment, and incomes. Supply-siders, on the other hand, believe that tax-cut dollars should go into savings, which would be available for real investment thereby reducing costs, increasing output, creating jobs, and increasing incomes. Tax legislation in the 1980s was oriented toward tax reductions for business and high-incline taxpayers who have a larger propensity to save. Fully 35% of the total tax-cut dollars went to the 5.6% of income earners making over $50,000 a year. Increases in Social Security taxes and lax bracket creep resulting from inflation ate up all of the tax-cut dollars of those earning less than $50,000 a year. The supply-side strategy requires an increase in the savings rate. However, research has shown the savings rate to be quite constant over time. Furthermore, although the average savings rate is greater for high-income earners than for low-income earners, the marginal propensity to save is about the same for both groups. Those earning over $50,000 a year arc no more likely to save their tax-cut dollars than those earning under 550.000. Another assumption of the supply-side tax cuts was that increasing the after-tax rate of return on savings would cause an increase in the savings rate. Studies do not support this assumption. Some people arc induced to save more when the after-tax rate of return is increased. However, people whose objective is a specific level of future income from their assets can achieve that objective with a lower savings rate when the after-tax rate of return on savings is increased. These two groups cancel each other out. leaving the overall rate of savings unaffected by changes in the after tax rate of return. Economic Reasoning What discretionary fiscal policy measure is discussed in this application? Docs the multiplier effect work on tax-cut dollars as well as on government expenditure dollars? How? Was the tax legislation passed in the 1980s wise and effective fiscal policy? Why or why not?

Explanation / Answer

1. it is contradictory fiscal policy

2. when the multiplier increases, the payment of taxes will be higher

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