(TIỂU LUẬN) SCIENTIFIC RESEARCH THE FISCAL POLICY OF THE UNITED STATES

UNIVERSITY OF FINANCE – MARKETING SCIENTIFIC RESEARCH THE FISCAL POLICY OF THE UNITED STATES Students’ Name Class ID Code Contribution Nguyen Thi Bich Tram IP18DAF 1821002410 100% Dao Thanh Xuan IP18DAF 1821005340 100% Vo Huynh Uyen Trang IP18DAF 1821003096 100% Huynh Le Thai Nhan IP18DAF 1821002409 90% Nguyen Thai Hung IP18DKQ02 1821002532 100% Ho Chi Minh City, 2020 UNIVERSITY OF FINANCE – MARKETING INTERNATIONAL SCHOOL SCIENTIFIC RESEARCH THE FISCAL POLICY OF THE UNITED STATES Supervisor: Assoc Prof PhD Tran Nguyen Ngoc Anh Thu Students’ Name Class ID Code Contribution Nguyen Thi Bich Tram IP18DAF 1821002410 100% Dao Thanh Xuan IP18DAF 1821005340 100% Vo Huynh Uyen Trang IP18DAF 1821003096 100% Huynh Le Thai Nhan IP18DAF 1821002409 90% Nguyen Thai Hung IP18DKQ02 1821002532 100% Ho Chi Minh City, 2020 ACKNOWLEDGEMENT We hereby guarantee that my team will self-study the science research paper and have reviewed some test findings and evidence on the internet, as well as some advice from the science professors But through the study, we have paralleled this with the expertise we have gained, based on this scientific research we find that we are more thorough We take full responsibility for this guarantee Ho Chi Minh City, 2020 ABSTRACTS In the research article, we describe key sections of the research material The first is the fiscal policy theory, we describe the idea of fiscal policy as a macroeconomic policy instrument that influences the scale of economic output by government expenditure or taxation, then explicitly define fiscal policy instruments as government expenditures involving the procurement of goods or services that raise or decrease GDP and influence economic activities Furthermore, the second instrument of fiscal policy is to raise or decrease the tax on government, which would impact economic development through tax reforms Taxes can differ in a number of ways Furthermore, by review on the graph, we explain two fiscal policies which are expansionary fiscal policy and contractionary fiscal policy Next, we clarify how aggregate demand affects monetary policy If the tax spending of the government is higher than its income, the result would be a financial account deficit Likewise, if the disbursed government's revenue is higher than the capital spending, it leads to a capital account deficit or deficit Budget shortfalls are typically expressed as a percentage of GDP Additionally, we clarify how the government is using measures to boost the economy An optimistic stabilization approach is a government or bank tactic to sustain steady economic growth and limited market adjustments Maintaining policy consistency includes analysis of the market cycle and changing the regular ratios as required to cope with demand shifts In Chapter 3, we think specifically about the economic effects of US fiscal policy 2018 Firstly, we're providing an outline of America Next, we clarify the economic policies the U.S government would have in 2018 Finally, we are evaluating with concrete facts the effect of that strategy on the US economy in 2018 We make a conclusion after evaluating the effect of US fiscal policy 2018 and comparing it with the theory We also used analysis approaches to explain the contents When we study fiscal policy, the main purpose is that since fiscal policy has a lot of economic influence, it is important to research and understand more about the effects of fiscal policy on the United States and other nations Central to global growth and prosperity is the macroeconomics Rebalancing the consumer system when there are signs of inflation or contraction, especially in large countries such as the US This country has a solid economy and an impact that is mainly global The research framework is US fiscal policy in 2018 We use analytical methods for clarifying the information, principles, and interpretation of the results After analysis, the second approach used is the synthetic approach Lastly, mathematical and comparative approaches exist for making information more rational when it comes to results We have evidently seen the consequences of Our monetary policy, namely the expansionary fiscal policy as the government raises budget expenditures over the years, contributing to loanable money, interest rates, and particular inflation Economic spending increases there, or as government tax cuts, the unemployment rate From there we will see the good sides to being preserved, and the negative sides to being resolved for the better economy to build TABLE OF CONTENTS CHAPTER 1: INTRODUCTION 1.1 Reason to choose the topic 1.2 Objectives of the research 1.3 Some goals we will achieve in the research 1.4 Scope and object of the research 1.5 Research method and data of the research 1.6 Structure of the research CHAPTER 2: FISCAL POLICY THEORIES 2.1 Definition of fiscal policy 2.2 Fiscal policy influences aggregate demand 2.3 Using fiscal policy to stabilize the economy 10 CHAPTER 3: ANALYZING 12 3.1 General of the United State 12 3.2 Fiscal policy of the United State in 2018 13 3.2.1 Expansionary Fiscal Policy 13 3.2.2 Impacting of expansionary fiscal policy in USA 2018 14 3.2.3 Impacting of contractionary fiscal policy in USA 2018 32 3.3 Discussions 34 CHAPTER 4: CONCLUSIONS AND POLICY IMPLICATIONS 35 4.1 Conclusions 35 4.2 Policy implications 35 4.3 Limitation of the research in the future 36 GLOSSARY i REFERENCES ii i LIST OF FIGURES Figure 1: Expansionary Fiscal Policy (Source: OpenStax College, 2016) Figure 2: A Contractionary Fiscal Policy (Source: OpenStax College, 2016) Figure 3: Graphical system of budget deficit (Source: Policonomics) Figure 4: Graphical system of tax cuts (Source: Authors, 2020) Figure 5: Statutory Central Government Corporate Tax Rate (percent) 15 Figure 6: TCJA Growth effects 17 Figure 7: Comparison of combined central and sub-central government corporate tax rates 19 Figure 8: Static net fiscal revenue impact of the tax reform, 2018 to 2027 20 Figure 9: Table compares US federal spending and revenue in 2019 vs 2018 using CBO historical data 25 Figure 10: CBO projections of U.S Federal spending as % GDP 2014-2024 26 Figure 11: A pie chart showing global military expenditures by country for 2018, in US$ billions, according to SIPRI 30 ii LIST OF ABBREVIATION AD: Aggregate Demand AS: Aggregate Supply CPI: Consumer Price Index FDI: Foreign Direct Investment Fed: Federal Reserve System GDP: Gross Domestic Product PCE: Personal Consumption Expenditures TCJA: Tax Cuts and Jobs Act US: United State iii CHAPTER 1: INTRODUCTION 1.1 Reason to choose the topic The United States is increasingly developing with the current dizzying economic growth, the businessmen are trying to expand production to create more goods to serve the limitless needs of people The more goods people consume, the more the GDP increases, the more the country develops, but the creation of more goods inadvertently leads to some negativity Commodities grew faster than human needs, leading to oversupply and inflation Many times, in the history of American economic policy from the Great Depression of the 1930s to the present, the government has been striving to find a mixed monetary and fiscal policy solution that allows for sustainable growth and price stability This is no easy task, and there are significant failures along the way The government has to step in to resolve that situation by enacting fiscal policies How fiscal policy will affect the US economy that is why we choose the topic In addition, we want to let everyone understand more about the US economic situation and the fiscal policy that has helped America maintain its position in the world and become more and more developed Help us to understand and learn some more problems and knowledge from America Although the current incredible economic development in the United States is rapidly growing, the businesses are seeking to increase production and produce more products to satisfy people's boundless needs The more goods people buy, the higher the GDP, the more the world grows, but unintentionally making more goods leads to a certain dissatisfaction Commodities rose more quickly than human needs, resulting in over-supply and inflation To fix this problem, the government needs to move in by enforcing fiscal policies Fiscal policy would impact the US economy, so we chose the topic Therefore, the reasons to choose this topic include: Fiscal policy affects the economy a lot, it is necessary to study 1 and learn more about the effects of the United States as well as other countries, fiscal policy is an important macroeconomic for stability and economic development In order to rebalance the market economy when there are signs of inflation or recession, especially in large countries like the US The country has a strong economy and largely affects the globe Brings a lot of effect to the transformation of the country’s economy That overview is the topic that our group thought was necessary and practical to research 1.2 Objectives of the research In the current open economy, the effectiveness of fiscal policy depends on the exchange rate regime If it is a fixed exchange rate regime, the financial policy will be effective If the exchange rate regime is floating, the financial policy (fiscal policy) will not take effect because the exchange rate changes caused by the financial policy will eliminate the effectiveness of the policy So we will research about the fiscal policy and how it works in the economy of the United States in 2018 1.3 Some goals we will achieve in the research This research will allow us to achieve some of the targets we set The first is the more basic definition of America's fiscal policy, and how it functions, as well as the theory-based adjustment of federal expenditure and taxes Eventually, the impact on the US economy of the country's fiscal-policy activities In addition, we will give some implications policy for the United States to develop their country The questions: - How is the United States government implementing fiscal policy to stabilize the economy? - What are comments and implications policy for the United States? CHAPTER 3: ANALYZING 3.1 General of the United State The U.S inflation rate rose at the highest rate in more than years in May 2018, thus strengthening the possibility of a steady rate increase in the U.S Federal Reserve System (Fed), though at the same time eroding "wage-capital development momentum remains at a fairly low level given the unemployment rate at 3.8 percent The consumer price index (CPI) increased by 0.2 percent from the previous month and by 2.8 percent year-on-year, according to previous estimates, the US Labor Department report said on Thursday Four (12 June) It reflects the fastest annual rate of inflation since February 2012 The core inflation index, excluding food and energy costs, rose by 0.2 percent from the previous month and 2.2 percent compared to May 2017, that is also in line with economists' estimates Personal Consumption Expenditures (PCE) — the Fed 's preferred inflation measure and a different indicator from the inflation rate of the US Department of Commerce — is the Fed's March and March percent target 4/2018, and that is usually marginally lower than the US Labor Department's CPI At the same time, some Fed officials predict that temporary over-target inflation will not automatically rush rate hikes, after years of below target inflation Figures published on May 31 from the U.S Department of Commerce show that the Fed's favored inflation indicator rose by 1.8 percent in April 2018 compared to the same time last year Another US Department of Labor report on Tuesday (June 12) revealed that in May 2018, the average hourly wage (with an adjustment to inflation) was nearly unchanged year on year Investors expect the Fed to increase interest rates at the meeting in June 2018, while at the same time updating its forecast The US unemployment rate fell to 3.8 percent In May 2018, percent, the lowest in 48 years and shows that the Fed is in or close to full employment Based on all the factors that affected the US economy, the drastic change could be easily seen, the United States at that time was considered a developing country (Hao Vu, 2018) 12 3.2 Fiscal policy of the United State in 2018 In this section, we will examine in detail a single country's fiscal policy which is the US in 2018 Significant tax cuts were approved at the end of 2017, and in early 2018 President Trump gave the green light to an expansion in federal spending equal to 0.7% of GDP Such obviously expansionary policies will have a substantial short-term effect on economic growth Nonetheless, their influence will diminish in the next several quarters and, consequently, the position of monetary policy would rely to a greater degree on three new factors: potential government shutdowns, mandatory budget reductions and infrastructure investment 3.2.1 Expansionary Fiscal Policy Expansionary fiscal policy is used by the government in trying to offset the business cycle’s contraction period (especially when in or on the verge of a recession), and in an effort to boost economic growth, it uses strategies such as tax cuts or increased government spending on items like public works Therefore, expansionary fiscal policy seeks to remedy a decline in demand by giving consumers tax cuts and other benefits (and how much they spend) to increase their purchasing power The goal behind expansionary fiscal policy is to lower tax rates and raise overall consumer demand, which will increase product demand, allowing companies to recruit more workers to meet higher demand – and thus increase jobs Or, by spending on some public works or benefit programs, such as building roads, schools, parks, or the like, the government could try to stimulate the economy and increase employment Just after the financial crisis of 2008, the government shelled out some serious cash (to the tune of around $831 billion) for the 2009 American Recovery and Reinvestment Act, which included many targets, this aimed to improve infrastructure programs, provide tax cuts and raise expenditure on health and education to stimulate the economy 13 3.2.2 Impacting of expansionary fiscal policy in USA 2018 A THE TAX CUTS AND JOBS ACT The priorities underpinning the Tax Cuts and Jobs Act (TCJA) are largely understood Specifically, as the administration has pointed out, the U.S tax code has long required reform to simplify the system; make U.S corporate tax competitive; provide tax relief for Americans with lower and middle incomes; lower statutory rates and expand tax bases; raise equity (including taxation) taxing households at equal income levels in a uniform manner, irrespective of their type of company or source of income); not offering income tax cuts for the rich; and achieving any of these goals without contributing to the fiscal deficit The Act includes a lot of positive measures in that respect These include initiatives to reduce the reach of personal income tax deductions, lower marginal tax rates, establish private investment incentives, tackle base erosion and crossborder benefit changes, and minimize debt biases However, the accepted reforms in tax policy have a high budgetary expense at a time when the federal budget desperately requires revenue The temporary existence of certain laws, however, causes substantial tax policy confusion and volatility within the tax system Business Tax The reduction of the statutory tax rate to around the OECD average and the limitation of certain forms of capital elimination are positive changes which, taken in isolation, will help to encourage investment and reduce the incentive to base erosion and profit shift However, the Act also requires interest deductibility, with a limit as a percentage of earnings Such debt-financed investment deductibility, which can be invested immediately, conveys excessively generous advantage and proceeds to incentivize debt financing Moreover, the cap introduces a procyclical distortion into the environment (because the cap becomes more binding as 14 earnings decline which may intensify pressures and bankruptcies in the private sector in a downside scenario) In addition, the temporary existence of the expenditure clause distorts the timing of investment decisions made by companies (to support investment before the provisions expire) To further improve U.S company tax competitiveness and to lessen the uncertainty it produces in investment decisions, it would be better to go further in the direction of the TCJA and transfer the US to a cash flow levy, effectively allowing all capital outlays to be invested and removing the deduction for interest expenditure on newlycontracted debt in full The decision to levy a very low, one-time tax rate on the stock of unrepatriated income conveys substantial benefits to taxpayers who choose not to repatriate profits Finally, the preliminary evidence is that US multinationals have dramatically expanded their proposals for share buybacks and dividend payouts following the tax reform Figure 5: Statutory Central Government Corporate Tax Rate (percent) Personal Income Tax There are also beneficial benefits to the personal income tax reform That include the reduction of certain itemized deductions, a higher standard deduction 15 and the removal of personal exemptions, state and local tax deduction caps and a lower mortgage interest deduction cap In the next few years, most U.S households will see their income tax lowered However, the net result of the reforms in tax policy — which also entail decreases in the cost of alternative minimum tax and a decrease in the marginal rate for higher income households — provides greater benefits for those in the upper income distribution deciles As a result, those changes are likely to exacerbate the polarization of income They would also nothing to resolve the urgent needs of the working class, both of which have been identified in the past as critical, macroeconomically related concerns In fact, the relative burden on low- and middle-income households is rising as different provisions expire In order to adequately prioritize tax relief for lower- and middle-class Americans and avoid income tax decreases for the rich, it would be desirable to recalibrate the rate structure so as to focus tax relief on those earning close to or below average income (with phasing-out tax relief for those making more than 150 percent of average income––the top third of the income distribution) As part of this reform, and in line with previous guidance, the Earned Income Tax Credit benefits and fairness should be expanded, and there is potential for removing loopholes and special laws for high-income earners, including the carried interest clause The combination of these policy changes would help low and middle-income families, increase demand in the private sector, increase jobs, and increase living standards * US President Donald Trump signed the Tax Cuts and Jobs Act on 22 December 2017, in a significant legislative achievement This tax reform, effective January 1, 2018, involves a major overhaul of the US tax system The reform involves a large number of changes, some of its main provisions being: a permanent reduction in the rate of corporate tax from 35 % to 21%, while allowing absolute deduction of savings from the corporate tax base for five years of which it will be phased out; temporary simplification and reduction of individual income taxes and rises in child tax credits; lower income taxes on small business owners; 16 and abolition of taxes on most overseas corporate profits of the corporate shareholders, it means a move towards a “hybrid” territorial scheme with a onetime transfer tax on untaxed gains of 15.5% on liquid and 8% on non-liquid properties The territorial scheme is augmented by baseline reduction measures and a minimum tax on some of the US corporations’ overseas operations The Tax Cuts and Jobs Act (TCJA) lowered corporate and individual income tax rates and increased corporate incentives to invest Most likely, these features have increased output in the short run, and will continue to so in the long run, but most analysts estimate the modest effects that only offset a portion of the bill’s revenue loss (table 1) Figure 6: TCJA Growth effects So far, the TCJA has probably primarily influenced the economy by increasing demand for goods and services Cuts to individual income taxes mean that most households are likely to spend more after-tax income Furthermore, provisions such as allowing some capital investment to be expensed may have increased investment spending by companies As companies see more of their 17 goods being purchased, they are responding by boosting production and boosting economic output Growth rose to 2.9 per cent in 2018, from 2.4 per cent in 2017, probably largely due to TCJA's on-demand impact However, Growth slowed down to 2.3 per cent in 2019 Nevertheless, those short-run effects were probably minimal, for two key reasons First, much of the tax cuts flow to higher-income households or corporations that tend to hold the wealthy's stock Higher income households tend to spend less of their post-tax income rises than households with lower incomes Second, tax cuts were implemented at a time when unemployment was low, and output was close to their potential level The increase in demand was therefore offset by tight monetary policy, since the Federal Reserve held interest rates higher than they would otherwise have been to avoid rising inflation The TCJA is likely to impact the economy in the longer term primarily through increased incentives to work, save, and invest Lowering individual income tax rates means workers can keep more out of every additional dollar of wages and wages This will encourage people to work longer hours and attract some new labor force entrants Those reduced rates are, however, scheduled to expire by the end of 2025; there is little or no tax incentive to increase work after that Lower individual tax rates, lower corporate tax rates, capital investment expenditures, and other reductions in corporate tax rates will increase the aftertax return on savings, encouraging households to save and lower investment costs for companies Those changes will, by most estimates, result in more investment, a larger capital stock and higher output The increased investment must be financed by a combination of private savings, public savings (or government budget surpluses), and foreign net lending (which could take the form of1bond purchases, portfolio investments, or direct physical capital investments) Most analysts, consistent with empirical studies, 18 estimate that private saving would only rise modestly in response to a increase in the rate of return after tax And the budget, by rising the deficit, decreases public savings Thus, much of any increase in TCJA investment is likely to be funded by net foreign lending This will increase the future interest and profit payments flowing to foreigners, thereby1 reducing the resources available to American people For this reason, when examining the effects of TCJA, it may be more enlightening to look at changes in gross national product (which subtracts that type of payment) rather than (which does not) gross domestic product * In a variety of euro area economies, the tax burden on US corporate profits would drop substantially to a point like that Chart A displays the United States' corporate tax rate (combined for central and sub-centric governments) before and after the reform as opposed to the broad economies of the euro area Due to the reform, the US corporate tax rate surpassed the rates in all major euro area countries, although it is closer to the lower end of the rates in those countries after the reform Figure 7: Comparison of combined central and sub-central government corporate tax rates 19 *Overall, the legislation will provide the US economy with substantial fiscal support over the next decade The Joint Taxation Committee calculates the static net fiscal stimulus for individuals and companies at around USD 1.46 trillion over ten years, or an average of 0.7 per cent of GDP per year The largest revenue impacts arise in the timeframe up to 2025, mainly because most individual-affected laws expire after 2025 The revenue effects of the laws affecting domestic companies are also declining over time, partially due to the progressive phasing-out of investment bonus depreciation The reform 's largest direct revenue source comes from the one-off overseas income tax of US multinationals on which tax payments were postponed before repatriation to the US ... conclusion and policy implications are chapter four of the research CHAPTER 2: FISCAL POLICY THEORIES 2.1 Definition of fiscal policy *Definition of fiscal policy Fiscal policy refers to the use of government... object of the research 1.5 Research method and data of the research 1.6 Structure of the research CHAPTER 2: FISCAL POLICY THEORIES 2.1 Definition of fiscal policy ... are the limits of the fiscal policy Research objects: fiscal policy to stabilize the economy in a country 1.5 Research method and data of the research To help people better understand the US fiscal