Economics

The world is just recovering from what is arguably the worst economic crisis since the Great Depression. The impact of the economic crisis was heaviest between 2008 and 2009, threatening to bring the worlds largest, and seemingly resilient, economies to their knees. Democrats and Republicans agreed that the economic situation in their country was grim and unless something was done to reverse or arrest the trend, the economy would collpase. Since 2001 when the US economy started shrinking, former President Bush had implemented several tax-cuts in attempts stimulate the economy. Bush and his successor have implemented more tax cuts in spite of their cost on the federal budget.

Leaders of countries experiencing recessions or slowdowns oftentimes opt for tax cuts as a step towards reviving their economies. Tax cuts are meant to ensure that the citizenry has more money to spend, as spending sustains demand for commodities. According to Francis, when taxes are cut, funds are provided immediately and directly to households to spend or save. With more money to spend, the citizens ensure that demand for commodities does not collapse. Subsequently, companies do not lay off their workers due to diminishing demand for their products.

John Maynard Keynes argued that one individual gets income from what another spends. Thus, economy is driven by spending. During a recession, most consumers have little to spend. Predictably, demand for products falls, forcing companies use only a fraction of their resources, and lay off workers. To sustain demand during slow-downs, the government has the duty of boosting spending. Tax cuts stimulate spending which in turn  increases demand for commodities, and profits and earnings for industrialists and their workers, thereby encouraging spending. This is the multiplier effect.

The 200809 financial crisis generated fears among the leaders that unless the leadership adopted a stimulus plan, thousands would lose jobs. Experts believed that an expansionary fiscal policy would help fill the gap between potential gross domestic product and the actual gross domestic product. They estimated that the percentage response of output growth to a shift in the tax ratio (the tax multiplier) for the 2009 tax cuts would stand at 1.0 for up to four quarters after the tax cuts and rise slightly after two years after which the effect of the tax cut would level off. Experts believe that an expansionary fiscal policy, whether involving tax cuts, increased government spending or a combination of both, boosts an economys aggregate demand.