Tax Rates, Open Market Operations and the Relationship Between Deficits and the National Debt

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TAX RATE

The pros and cons of using a change in the tax rate to achieve the desired increase in output. Be sure to thoroughly explain how the change will affect equilibrium prices, output, and unemployment.

Taxation is an issue of Fiscal policy. Fiscal policy refers to nation's policy relating to the government spending, taxing, borrowing and debt management. The main objectives of the fiscal policy are:
1. Mobilization of resources
2. Acceleration of the economic growth
3. To minimize the inequalities of Income and Wealth.
There are three main constituents of the fiscal policy, these are:
1. Taxation policy
2. Public Expenditure policy
3. Public debt policy
All these constituents must work together to make the fiscal policy sound and effective

TAXATION POLICY
The main objectives of the taxation policy are:
- Mobilization of resources
- Acceleration of the economic growth
- To minimize the inequalities of Income and Wealth.
The main objectives for which taxes are levied is to raise revenue by transferring resources from the public to government and the opposite applies when the government cut the taxes so that some resources are transferred from the government to public. It will depend on the tax system that how much it has impact on the economy. The characteristics of good tax system are:
- Equity in distribution of tax burden
- It should yield a satisfactory amount for the maintenance of a government.
- It should maximize social benefit that is redistribution of wealth and reducing the inequalities of income.
It will depend on the tax system that how much it has impact on the economy.

Different strategies
If the economy is in recession then the tax credit and tax cuts will increase the disposable income and hence thus increase the overall production of the economy. It will help in recovery of the economy.

If the economy overheated then the reverse strategy can be employed.

For example, The tax cuts from the past few years have been partially successful in promoting economic growth or in preventing a deeper decline. There should be increase in the employment but in the USA this not achieved. Reduction in the taxation increases the disposable income of the society there by increasing the expenditure or consumption the economy. This in turn increases the economic growth. Many economists believe output has climbed because of higher labor productivity. So there has been no need to create new jobs. But ...