INTRODUCTION
Reason to choose the topic
The United States is experiencing rapid economic growth, prompting businesses to expand production to meet the ever-increasing consumer demand However, this surge in goods often leads to oversupply and inflation, as commodities outpace human needs Throughout history, from the Great Depression to the present, the government has sought effective monetary and fiscal policies to ensure sustainable growth and price stability, facing significant challenges along the way To address these economic fluctuations, fiscal policies play a crucial role in stabilizing the economy This article aims to explore the impact of fiscal policy on the U.S economy and enhance understanding of the strategies that have helped America maintain its global position and foster continued development.
Despite the rapid economic growth in the United States, businesses are striving to increase production to meet the insatiable demands of consumers This surge in goods purchased contributes to a rising GDP; however, it also leads to over-supply and inflation, as the production of commodities outpaces human needs To address these challenges, it is crucial for the government to implement effective fiscal policies Understanding the significant impact of fiscal policy on the US economy is essential, making it a vital area of study.
Fiscal policy plays a crucial role in maintaining macroeconomic stability and fostering economic development, particularly in large economies like the United States As a significant player on the global stage, U.S fiscal policy influences not only its own economy but also has widespread effects on other countries Understanding the impact of fiscal measures is essential for rebalancing the market economy during periods of inflation or recession This topic is both necessary and practical for our research group to explore.
Objectives of the research
In today's open economy, the effectiveness of fiscal policy is closely tied to the exchange rate regime Under a fixed exchange rate regime, fiscal policy proves to be effective; however, in a floating exchange rate system, the impacts of fiscal policy are diminished as exchange rate fluctuations undermine its effectiveness This article will explore the dynamics of fiscal policy and its functioning within the United States economy.
Some goals we will achieve in the research
This research aims to clarify America's fiscal policy, detailing its definition, functionality, and the theoretical adjustments of federal spending and taxation Additionally, it will explore the effects of these fiscal policy activities on the US economy and provide policy implications to support the nation's development.
- How is the United States government implementing fiscal policy to stabilize the economy?
- What are comments and implications policy for the United States?
Scope and object of the research
To grasp the essence of US fiscal policy in 2018, it is crucial to comprehend the fundamentals of fiscal policy, including its key tools and mechanisms Understanding how fiscal policy can generate a multiplier effect is essential, as it highlights the broader economic impacts of government spending and taxation Additionally, analyzing trends in fiscal policy interventions provides insight into the government's strategic decisions during this period Finally, recognizing the limitations of fiscal policy is vital for evaluating its effectiveness and sustainability in addressing economic challenges.
Research objects: fiscal policy to stabilize the economy in a country.
Research method and data of the research
To enhance comprehension of US fiscal policy, we employ four key measures utilizing secondary data First, we apply analytical methods to elucidate the main concepts associated with the policy Second, we utilize synthesis techniques to summarize the various viewpoints impacting US fiscal policy Third, we implement statistical methods to analyze data reflecting US development across different periods Finally, we draw comparisons among individuals to highlight the visible differences in growth levels over time.
Structure of the research
The content of the report includes four main sections There are:
- Chapter one is general introduction to the topic
- Chapter two is some theoretical concepts related to the United State fiscal policy
- Chapter three we will analysis some clear cases in point of United State fiscal policy
- Finally, conclusion and policy implications are chapter four of the research
FISCAL POLICY THEORIES
Definition of fiscal policy
Fiscal policy involves government spending and tax strategies aimed at influencing economic factors such as consumer demand, wages, inflation, and overall economic growth It complements monetary policy, where a central bank manages a nation's money supply Both policies serve distinct roles in achieving regional economic objectives As a macroeconomic tool, fiscal policy significantly affects economic activity through government expenditures and tax adjustments, primarily impacting aggregate demand for goods and services in the short term.
Keynes argued in 1930 that the government had to boost spending and be able to tolerate a budget deficit to shift the economy from an unemployed state to a near-full state
*The tools of fiscal policy: Government spending and taxation
Government spending involves the procurement of goods and services, such as new vehicles for federal officials and national defense missiles As a crucial component of fiscal policy, government spending can significantly influence real GDP by either stimulating or contracting economic activity By adjusting budget expenditures, the government can effectively impact overall economic performance.
Government spending not only directly impacts the economy but also creates a multiplier effect as it benefits businesses that provide goods and services to the government This, in turn, allows consumers to spend their earnings from these businesses, further contributing to the growth of actual GDP.
Taxes are a fiscal policy instrument because tax increases impact the In this section, we will examine in detail a single country's fiscal policy which is the US
Between 2018 and 2020, the average customer's income and spending adjustments significantly contributed to real GDP improvements Consequently, government intervention through tax changes can influence economic production This can be achieved by increasing or decreasing marginal tax rates, completely abolishing certain taxes, or modifying existing tax laws.
*Expansionary and contractionary of fiscal policy
During the 2008-2009 recession, the U.S economy experienced a significant downturn, as illustrated in Figure 1, where the intersection of aggregate demand (AD0) and aggregate supply (AS0) occurred below potential GDP This equilibrium (E0) led to rising unemployment and a recessionary environment Utilizing a Keynesian perspective, which emphasizes short-run macroeconomic policies, expansionary fiscal measures such as tax cuts or increased government spending can effectively shift aggregate demand to AD1, moving closer to full-employment output levels Consequently, this policy approach would also elevate the price level to P1, aligning it with potential GDP.
Figure 1: Expansionary Fiscal Policy (Source: OpenStax College, 2016)
The original equilibrium (E0) indicates a recession, with output (Yr) falling short of potential GDP An expansionary fiscal policy can shift aggregate demand from AD0 to AD1, leading the economy to a new equilibrium output at E1, aligning with potential GDP Given that the economy was initially underperforming, the subsequent inflationary rise in the price level from P0 to P1 is expected to be minimal.
Fiscal policy can effectively mitigate an overheating economy by implementing contractionary measures When macroeconomic equilibrium is reached at a GDP level exceeding potential, as illustrated in Figure 2, the intersection of aggregate demand (AD0) and aggregate supply (AS0) is at equilibrium E0 In such cases, reducing federal spending or increasing taxes can alleviate upward pressure on prices by shifting aggregate demand leftward to AD1, resulting in a new equilibrium at potential GDP, denoted as E1.
Figure 2: A Contractionary Fiscal Policy (Source: OpenStax College,
2016) The economy starts at the equilibrium quantity of output Yr, which is above potential GDP The extremely high level of aggregate demand will generate
A contractionary fiscal policy can effectively reduce aggregate demand from AD0 to AD1, resulting in a new equilibrium output at E1, aligned with potential GDP The AD-AS model does not specify the method for implementing this policy; options may include spending cuts or tax increases, depending on the circumstances Ultimately, the model emphasizes the necessity of reducing aggregate demand in this context.
Fiscal policy influences aggregate demand
Aggregate demand (AD) is a key macroeconomic concept that reflects the total demand for goods and services within an economy It is influenced by fiscal policies, which can alter the components used in its calculation AD is assessed using the same formula as gross domestic product (GDP), encompassing consumer spending (C), investment in business capital (I), government expenditure on public goods (G), exports (EX), and imports (IM) (Hall, 2019).
A budgeting deficit occurs when there is a discrepancy between budget revenues and current account expenditures It represents the shortfall in both the tax account and capital account When government tax expenses exceed revenue collections, it leads to a budget account deficit Likewise, if revenue disbursements surpass capital expenditures, a capital account deficit arises Typically, the budget deficit is expressed as a percentage of GDP.
Figure 3 Graphical system of budget deficit (Source: Policonomics) :
When a country experiences a budget deficit, the availability of loanable funds decreases, shifting the supply of loanable funds (SLF) to the left This situation ultimately increases the government's income, but it also leads to unfavorable outcomes by lowering gross benefits As the supply of loanable funds diminishes, the overall equilibrium quantity declines, while the real interest rate rises to i1 This increase in the real interest rate results in a reduced outflow of net money, which in turn decreases net capital outflow Consequently, the reduced availability of euros for foreign currency exchange contributes to a higher actual exchange rate.
Tax cuts reduce the total amount of money that taxpayers contribute to government revenue, which is a popular measure as it saves voters' money These cuts can take various forms, including reductions in income taxes, sales taxes, or property taxes They may also be implemented as one-time reductions, providing immediate financial relief to taxpayers.
9 refund, an average premium drop, or a tax credit Tax cuts include tax exemptions, exceptions, or grants, too
Figure 4: Graphical system of tax cuts (Source: Authors, 2020)
Changes in taxes significantly impact aggregate demand, with the perception of tax changes as either permanent or temporary influencing the extent of this shift When the government implements tax cuts, it stimulates consumption, leading to increased income and profits, which further boosts consumption This rise in income heightens the demand for goods and services, often resulting in increased interest rates However, higher interest rates can make borrowing more challenging, ultimately reducing investment spending Therefore, tax reductions not only enhance consumption but also shift aggregate demand to the right.
During a recession, a decline in aggregate demand leads to a recessionary gap, resulting in decreased output and higher unemployment To combat this, the government can implement expansionary fiscal policy by lowering taxes and increasing government spending, which aims to boost aggregate demand and achieve full employment output However, such measures typically create a budget deficit as government expenditures exceed revenues.
10 more than its revenue in a year, and such deficits add to the national debt (Brian Blackstone, 2014)
Using fiscal policy to stabilize the economy
Active stabilization policy is essential for maintaining stable economic growth and minimal price fluctuations, as it involves government or bank strategies that monitor the business cycle and adjust benchmark rates to address sudden demand changes Effective monetary policy can counterbalance fiscal policy adjustments, ensuring the government does not contribute to economic instability Instead, it should respond to shifts in the private economy to stabilize aggregate demand, which, according to Keynes, can be influenced by irrational waves of optimism and pessimism For instance, increasing taxes can lead to a decrease in aggregate demand, negatively impacting production and employment in the short term Therefore, expanding monetary policy during periods of pessimism can help mitigate these effects.
Monetary expansion leads to lower interest rates, boosting consumer spending and increasing aggregate demand When monetary and fiscal policies are effectively aligned, they can maintain stable aggregate demand for goods and services However, during periods of optimism, both households and firms tend to increase their spending, resulting in heightened aggregate demand, increased production, and potential inflationary pressures.
The case against active stabilization policy highlights that monetary policy often lags in its effects on the economy Recent proposals to ease monetary policy aim to meet the 2020 growth target set by the President, particularly as many industries struggle due to the impact of Covid-19 However, concerns about financial inflation persist Notably, the US economy fell short of its 2018 growth target of 3%, despite the boost from the President's tax reforms Currently, economic momentum continues to wane, with GDP growth adjusted for inflation slowing to an annual rate of 1.9% in the third quarter, down from 2% in the previous quarter.
Automatic stabilizers are crucial fiscal policy tools that automatically stimulate aggregate demand (AD) during economic recessions without the need for deliberate government intervention The tax system, particularly progressively graduated corporate and personal income taxes, plays a significant role as an automatic stabilizer, alongside government spending initiatives These stabilizers effectively mitigate fluctuations in the business cycle and can be implemented seamlessly They function to counterbalance variations in a nation's economic activity through their inherent operation, without requiring timely authorization from policymakers Well-known examples include unemployment insurance and welfare programs, which activate automatically to help stabilize the economy.
Government contractionary fiscal policy aims to reduce inflation when prices for essentials like clothing and food rise rapidly This increase in prices can boost savings and alter living standards, while also causing the unemployment rate to drop below its natural level As employers face challenges in finding sufficient workers to meet demand, production growth slows, leading to unsustainable investment costs When growth exceeds sustainable levels, it can trigger a recession, particularly in the presence of asset bubbles Unfortunately, recessions are an inherent aspect of the business cycle.
Fiscal policy plays a crucial role in fostering long-term growth by considering each country's unique needs, circumstances, and administrative capabilities within its institutional framework Achieving macroeconomic stability is essential for implementing effective fiscal policy reforms A modified approach that enhances the national budget through strategic public spending is more sustainable and significantly contributes to enduring economic development.
ANALYZING
General of the United State
The U.S inflation rate rose at the highest rate in more than 6 years in May
In 2018, the U.S Federal Reserve System (Fed) indicated a potential for steady interest rate increases, despite the low wage-capital development momentum associated with a 3.8 percent unemployment rate According to the U.S Labor Department's report on June 12, the consumer price index (CPI) rose by 0.2 percent month-over-month and 2.8 percent year-on-year, marking the fastest annual inflation rate since February 2012 The core inflation index, which excludes food and energy, also increased by 0.2 percent from the previous month and 2.2 percent compared to May 2017, aligning with economists' forecasts Additionally, the Personal Consumption Expenditures (PCE) index, the Fed's preferred inflation measure, remains at a 2 percent target, typically slightly lower than the CPI reported by the Labor Department.
Some Federal Reserve officials believe that temporary inflation exceeding targets will not necessarily lead to immediate interest rate hikes, following years of below-target inflation Data from the U.S Department of Commerce indicates that the Fed's preferred inflation measure rose by 1.8% in April 2018 compared to the previous year Additionally, a report from the U.S Department of Labor revealed that average hourly wages, adjusted for inflation, remained nearly unchanged year-over-year in May 2018 Investors anticipate an interest rate increase during the Fed's June 2018 meeting, along with an updated economic forecast Notably, the U.S unemployment rate dropped to 3.8% in May 2018, the lowest in 48 years, suggesting that the economy is nearing full employment These factors highlight a significant transformation in the U.S economy, which was previously viewed as a developing country.
From 2018 to 2020, changes in the average customer's income and spending habits significantly impacted real GDP growth Consequently, government actions, particularly in tax policy, play a crucial role in influencing economic production This can be achieved by adjusting marginal tax rates, completely abolishing certain taxes, or modifying existing tax laws to stimulate economic activity.
*Expansionary and contractionary of fiscal policy
Consider first the situation in Figure 1, which is like the U.S economy d i h i i h i i f d d ( )
During the recession of 2008-2009, the intersection of aggregate demand (AD0) and aggregate supply (AS0) fell below the potential GDP level, leading to an equilibrium (E0) characterized by rising unemployment This analysis utilizes a Keynesian approach with an upward-sloping AS curve, emphasizing short-run macroeconomic policy rather than long-term effects To address this recession, expansionary fiscal policies, such as tax cuts or increased government spending, can shift aggregate demand to AD1, moving closer to full employment output and restoring the price level to P1, which aligns with potential GDP.
Figure 1: Expansionary Fiscal Policy (Source: OpenStax College, 2016)
The original equilibrium (E0) indicates a recession, with output (Yr) falling short of potential GDP However, an expansionary fiscal policy can shift aggregate demand from AD0 to AD1, leading the economy to a new equilibrium output (E1) at potential GDP Given that the economy was initially underperforming, the resulting inflationary increase in the price level from P0 to P1 is expected to be relatively modest.
Fiscal policy can effectively slow down an overheating economy by implementing contractionary measures When the macroeconomic equilibrium is above potential GDP, as illustrated in the scenario, a reduction in federal spending or an increase in taxes can alleviate upward pressure on prices This approach shifts aggregate demand leftward from AD0 to AD1, resulting in a new equilibrium at potential GDP, represented by E1.
Figure 2: A Contractionary Fiscal Policy (Source: OpenStax College,
2016) The economy starts at the equilibrium quantity of output Yr, which is above potential GDP The extremely high level of aggregate demand will generate
Contractionary fiscal policy can effectively reduce inflation by shifting aggregate demand from AD0 to AD1, resulting in a new equilibrium output at potential GDP, labeled E1 The AD-AS model does not specify the methods for implementing this policy, as preferences may vary between spending cuts and tax increases, or even depend on the specific economic context Ultimately, the model emphasizes the necessity of reducing aggregate demand to address inflationary pressures.
2.2 Fiscal policy influences aggregate demand
Aggregate demand (AD) is a key macroeconomic indicator that reflects the total demand for goods and services within an economy It is influenced by fiscal policies, particularly through changes in government purchases AD is calculated using the same formula as gross domestic product (GDP), which encompasses consumer spending (C), investment in business capital (I), government spending (G), exports (EX), and imports (IM) (Hall, 2019).
A budget deficit occurs when there is a discrepancy between budget revenues and current account expenditures, resulting from either excessive government tax costs or higher revenue disbursements than capital expenditures This shortfall is reflected as a percentage of GDP and encompasses deficits in both the tax and capital accounts.
Figure 3 Graphical system of budget deficit (Source: Policonomics) :
A budget deficit in a country reduces the available loanable funds, shifting the supply of loanable funds (SLF) to the left and increasing government income This situation leads to unfavorable outcomes, such as a decrease in gross benefits Consequently, the overall equilibrium quantity declines while the real interest rate rises to i1 This increase in the real interest rate results in a lower net money outflow, which subsequently reduces net capital outflow As a result, the amount of euros available for trading in foreign currency diminishes, ultimately contributing to a rise in the actual exchange rate.
Tax cuts directly reduce the total revenue collected from taxpayers, impacting government income These cuts are popular among voters as they help retain more of their money There are various forms of tax cuts, including reductions in income taxes, sales taxes, and property taxes These adjustments can be implemented as one-time reductions or ongoing changes, providing financial relief to individuals and businesses alike.
1 0 refund, an average premium drop, or a tax credit Tax cuts include tax exemptions, exceptions, or grants, too
Figure 4: Graphical system of tax cuts (Source: Authors, 2020)
Changes in taxes significantly influence aggregate demand, with the perception of tax alterations as either permanent or temporary affecting this shift When the government reduces taxes, it boosts consumption, leading to increased income and profits, which further stimulates consumption This rise in income fuels higher demand for progress, resulting in elevated interest rates Consequently, higher interest rates make borrowing more challenging, which can dampen investment spending Ultimately, tax reductions not only enhance consumption but also shift aggregate demand to the right.
During a recession, a decline in aggregate demand leads to a recessionary gap, resulting in decreased output and employment To combat this, the government can implement expansionary fiscal policy by reducing taxes and increasing government spending, which helps stimulate aggregate demand and aims to restore the economy to full employment levels However, such expansionary measures typically create a budget deficit due to increased government expenditure.
1 0 more than its revenue in a year, and such deficits add to the national debt (Brian Blackstone, 2014)
2.3 Using fiscal policy to stabilize the economy
Active stabilization policy is a government or bank strategy aimed at ensuring stable economic growth and minimal price fluctuations This requires careful monitoring of the business cycle and timely adjustments to benchmark rates to respond to sudden demand shifts Effective monetary policy can counterbalance changes in fiscal policy, helping to mitigate economic volatility The government should avoid causing economic fluctuations and instead respond to private sector changes to stabilize aggregate demand According to Keynes, aggregate demand is subject to irrational swings of optimism and pessimism For instance, raising taxes can lead to a decline in aggregate demand, negatively impacting production and employment in the short term In times of pessimism, the government can expand monetary policy to stimulate the economy.
Monetary expansion reduces interest rates, boosts consumer spending, and enhances aggregate demand When monetary and fiscal policies are appropriately calibrated, they can maintain stable aggregate demand for goods and services In contrast, during periods of optimism, increased spending by households and firms leads to heightened aggregate demand, increased production, and inflationary pressures.
The case against active stabilization policy that monetary policy lags in its ff t th Th h b l t l t li i
Fiscal policy of the United State in 2018
In 2018, the US implemented significant fiscal policy changes, including substantial tax cuts approved at the end of 2017 and an expansion in federal spending amounting to 0.7% of GDP, authorized by President Trump These expansionary measures are expected to boost short-term economic growth; however, their impact is likely to wane in the following quarters As a result, monetary policy will increasingly depend on three key factors: the potential for government shutdowns, mandatory budget cuts, and investments in infrastructure.
Expansionary fiscal policy is implemented by the government to counteract economic downturns, particularly during recessions, with the aim of stimulating growth This approach involves strategies like tax cuts and increased government spending on public works By providing consumers with tax reductions and other financial benefits, expansionary fiscal policy aims to boost demand and encourage spending, ultimately revitalizing the economy.
13 consumers tax cuts and other benefits (and how much they spend) to increase their purchasing power
Expansionary fiscal policy aims to reduce tax rates and boost consumer demand, leading to increased product demand This surge in demand enables companies to hire more workers, ultimately resulting in job creation.
To stimulate the economy and boost employment, the government can invest in public works and benefit programs, such as constructing roads, schools, and parks Following the 2008 financial crisis, the government allocated approximately $831 billion through the 2009 American Recovery and Reinvestment Act, which focused on enhancing infrastructure, offering tax cuts, and increasing spending on health and education to foster economic recovery.
3.2.2 Impacting of expansionary fiscal policy in USA 2018
A THE TAX CUTS AND JOBS ACT
The Tax Cuts and Jobs Act (TCJA) aims to reform the U.S tax code by simplifying the system, enhancing corporate tax competitiveness, and providing relief for lower and middle-income Americans Key priorities include lowering statutory rates, expanding tax bases, ensuring equitable taxation for households with similar incomes regardless of company type or income source, avoiding tax cuts for the wealthy, and achieving these objectives without increasing the fiscal deficit.
The Act introduces several positive measures aimed at enhancing the tax system, such as reducing personal income tax deductions, lowering marginal tax rates, and creating incentives for private investment Additionally, it addresses issues like base erosion, cross-border benefit changes, and aims to minimize biases related to debt.
The recent tax policy reforms, while accepted, impose significant budgetary costs at a time when the federal budget urgently needs revenue Additionally, the temporary nature of certain laws contributes to considerable confusion and volatility within the tax system.
The reduction of the statutory tax rate to align with the OECD average, along with the limitation of specific capital elimination strategies, represents a positive shift that encourages investment and mitigates the risks of base erosion and profit shifting.
However, the Act also requires interest deductibility, with a limit as a
The 14% cap on earnings for debt-financed investment deductibility creates a significant incentive for companies to pursue debt financing, leading to potential financial distortions This cap becomes increasingly restrictive during economic downturns, exacerbating pressures and increasing the risk of bankruptcies in the private sector Furthermore, the temporary nature of the expenditure clause disrupts the timing of corporate investment decisions, complicating financial planning and strategic growth initiatives.
The 15 expenditure clause impacts the timing of corporate investment decisions, prompting companies to invest before the provisions expire To enhance the tax competitiveness of U.S companies and reduce uncertainty in investment choices, a shift towards a cash flow levy, as suggested by the TCJA, would be beneficial This approach would allow for full investment of all capital expenditures while eliminating deductions for interest on newly contracted debt Additionally, implementing a low, one-time tax rate on unrepatriated income offers significant advantages to taxpayers opting not to repatriate profits Preliminary evidence indicates that U.S multinationals have significantly increased their share buyback and dividend payout proposals following the tax reform.
Figure 5: Statutory Central Government Corporate Tax Rate (percent)
There are also beneficial benefits to the personal income tax reform That include the reduction of certain itemized deductions, a higher standard deduction
The recent tax reforms, including the elimination of personal exemptions and the capping of state and local tax deductions, are set to lower income taxes for most U.S households in the coming years Additionally, these changes will reduce the cost of the alternative minimum tax and decrease the marginal tax rate for higher-income households, leading to an overall positive impact on taxpayers.
— provides greater benefits for those in the upper income distribution deciles
The recent changes are expected to worsen income polarization and fail to address the pressing needs of the working class, which have been recognized as significant macroeconomic issues Additionally, the financial strain on low- and middle-income households is increasing as various provisions come to an end.
To effectively prioritize tax relief for lower- and middle-class Americans, it is essential to adjust the tax rate structure, focusing on those earning near or below average income while phasing out benefits for individuals making over 150% of the average income This reform should include expanding the Earned Income Tax Credit and addressing loopholes that favor high-income earners, such as the carried interest clause Implementing these changes would support low and middle-income families, stimulate private sector demand, create jobs, and enhance living standards.
On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act, marking a significant overhaul of the US tax system effective January 1, 2018 This reform introduced a permanent reduction in the corporate tax rate from 35% to 21% and allowed for a full deduction of savings from the corporate tax base for five years before phasing out Additionally, it simplified and reduced individual income taxes temporarily, increased child tax credits, and lowered income taxes for small business owners.
The recent tax reforms, including the abolition of taxes on most overseas corporate profits, signal a shift towards a hybrid territorial tax system, featuring a one-time transfer tax of 15.5% on liquid assets and 8% on non-liquid properties This system is complemented by baseline reduction measures and a minimum tax on certain overseas operations of U.S corporations The Tax Cuts and Jobs Act (TCJA) has reduced both corporate and individual income tax rates while enhancing corporate investment incentives Although these changes are expected to boost economic output in both the short and long term, analysts predict that their overall impact will only partially offset the revenue losses resulting from the legislation.