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The global economy has been going through challenging moments with a lot of nations across the globe struggling on the road to economic recovery, as a result of the recent recession which devastated the economies of most nations around the world. The United States of American was not spared either. In fact, most economic and financial analysts from this nation have continued to reiterate that this recent economic recession was the worst since the depression of the 1930s. In line with this, the government of the United States has been working on different ways of ensuring that its economy is back on track. One of the proposed changes or rather strategies which have been proposed to deal with this issue is tax cuts. Following this point, the United States recently implemented tax cut policy that would allow the extension of Bush administration's tax cut for 2 years.
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In consistent with this, there are different arguments which have arisen in response to this action by the government. Notably, these arguments are inclined towards taking two sides, namely the pros and cons of tax cuts. In one of the articles which appeared recently in the Wall Street Journal, 'Economists React: Pros, Cons of Tax Deal' by Phil Izzo, prominent economists aired their opinions towards the tax cuts and how they would affect the economy for the next few years, both positively and negatively.
To begin, the economists argued that the implemented tax cuts would enable the United States to make a milestone in their road to economy recovery in the next few years. Most of the of the economists who applauded this action argued that tax cut would boost the economy of the United States in 2011 especially by reducing the unemployment rate and increasing the GDP. These economists argued that the real GDP growth will accelerate to 4%, job gains will pick up to 2.8 million, and the unemployment rate will decline to around 8.5% by the end of 2011 (Izzo, 2010). In addition to this, these economists argued that one of the parties which will benefit greatly by these tax cuts are the employers. Note that the current labor market was challenged by the high costs of hiring. However, the projection of some of the economists who responded to the implementation of this policy argued that these costs would be reduced substantially, with increased business cash-flows which will increase business investment (Izzo, 2010). The economist however affirmed that the impact of these tax cuts on business would be moderate.
Apart from looking at the impact of tax cuts on employment and the labor market as well as businesses, the economists also focused on the overall spending trends. Notably, some of the responses which were elicited by these economists showed that they believed that this policy would boost the spending behaviors of consumers in the American economy in the next one or two years since most of them had much to spend. Remarkably, the result of this deal, once passed, will support greater income and spending on the part of consumers and provide investors with a much clearer picture of short-term fiscal policy (Izzo, 2010).
On the contrary, there are a few economists who responded to the implementation of this policy who argued that there were few or rather little changes that need to be expected out of the tax cuts policy. In line with, whereas it was seen as a perfect opportunity for the United States to make tremendous improvements on the fiscal policies, the impact of these tax cuts had no impact on the economy. Arguably, whereas the United States had taken a bold step towards lengthening the tax cuts policy, there were other important issues which had destabilized the economy of the this country which were not solved by implementing this policy which were worsened by the short duration of the tax cuts. According to Izzo (2010), the tax cut was only for one year, and so it was unlikely to have a significant impact on consumer behavior (i.e. spending), especially when consumers were worried about falling house prices, stagnant 401(k)'s and keeping their jobs.
Similarly, since the United States was going through tough times economically, implementing the tax cut policies implied that the government's earning were going to be reduced by a substantial margin. As a result of this, the government of the United States might be forced to increase the state-level taxes to finance the budget deficits which would result from the implementation of this policy (Izzo, 2010). With this in mind, these economists cautioned the government not to rely on these tax cuts as the ultimate solution for the economic problems that this nation has been facing, noting that the solution which had been provided was short-term and could not address long-term economic problems. Instead, they affirmed that there need for the government of the United States to develop new policy approaches which will address these problems once and for all.
Essentially, whereas these economies in their response to the tax cut policy took two different sides, it is important to understand that there were a few of them, both supporters and skeptics of this move agreed that the solutions which had been brought about by this policy was short-lived and it was necessary and important to seek for supporting policies which would be implemented to support the implemented tax policy. This was affirmed more by the economists who argued that the tax policy had little impact on the economy.