Tax policy

Student’s Name Course Name Tutor’s Name Date Tax policy Specific Federal policies have been of interest to historians rather than the federal budget in aggregate. Political scientist Ippolito makes a solid argument that the total budget merits attention as ‘a measure of political reality that utilizes money.' The political scientist aims to highlight the political significance of budget policy from the nation’s founding to the current administration and determine what budget policy results indicate about past struggles and the role played by the government. This essay will discuss various interpretations of three presidential administrations namely President Bush, Reagan, and Clinton on the importance of revenue, spending, deficits, and debt in formulating tax policy to influence economic growth and budgetary policy. President Ronald Reagan's tax policy was based on the argument that the 70% top tax rate was very high and it demotivated citizens from working. According to his case when the rate was lowered the revenue collection would not reduce due to reduced tax rates but would increase as citizens would be encouraged to work more. The argument was politically useful as it led to the agreement on reducing the tax by traditional tax conservatives and theoretically slashing the tax would not add to the budget deficit. However in action, the tax reductions were not revenue neutral, and on the contrary, they led to the most massive deficits since World War 2 (Ippolito, 214). There was no increase in revenues with tax cuts as predicted by the president. Despite the outcomes of tax cuts during Reagan's administration, the same argument was incorporated in the George W. Bush regime in 2001. The Bush administration proposed that cutting down on taxes would contribute to the growth and hence taxable revenue and would not lead to an addition in deficits. However, just like the Reagan administration, the effect of the tax cut contributed to deficits. According to various economists, however, the introduction of tax cuts in the two administrations was done intentionally and was part of a wider political, economic plan called ‘starve the beast' which is centered on the argument that the government is primarily inefficient and the private sectors can handle things better(Ippolito, 269). Hence the monetary and tax policies are designed to shrink the government's role. In this plan, after a massive tax cut, with the support, it will contribute to revenue increase which in the end leads to a rise in deficit the president engages the American voters on whether to raise taxes or cut spending. With this in mind, many citizens will opt for cuts in social spending rather than tax increases, therefore, forcing government spending to reduce. Reagan's strategy of balancing the budget proved to be optimistic not only during 1984 but also over his two terms the general spending averaged more than 22% of GNP, while revenues were above 18% (Steuerle, 307). The regime produced a large deficit instead of balancing the budgets which were close to three times the publicly held debt. In his first year of office, the publicly held debt was approximately 25%, and at the end of his term, it was more than 40% (Steuerle, 309). According to Republicans in 2000's party platform, the surplus in the budget was brought about by over-taxation of the American people. This led to a $1.6 trillion tax cut based on the Bush campaign and reprised the economic incentives and growth rationales that had been introduced twenty years earlier by President Reagan and were meant to limit the government as well (Steuerle, 311). Being faced with the deficit inherited from the Reagan administration, Congress passed a bill in 1990 signed by President George H.W. Bush stipulating that any expenditure increases should be matched with tax increases or spending decreases a system that was referred to as PAYGO and was meant to prevent the increase in budget deficits (Ippolito,165). However, the first Iraq war along with the 1991 recession pushed deficits to 4% of the GDP by 1992 (Ippolito,166). President Clinton's administration took over and continued the PAYGO policy and also pushed for the tax increase. An increase in government revenue and higher taxes alongside an economic boom began to balance the government budget. The federal government lowered military expenditure after the end of the Cold War. At the end of Clinton's administration, the surplus was experienced the same as the start of George W. Bush which then led to a 3.5% deficit by 2003 attributed to The Bush tax cuts of 2001 and 2003 that reduced revenue, expansion of Medicare Program to cater for drugs prescriptions as well as the stock market decline of 2000 to 2002 (Ippolito, 233). However, even with the massive deficit after 2001, there was no deficit-reduction tax imposition or retrenchments as it were during the administration of Reagan, Bush H, and Clinton. According to Ippolito, under George Bush, budget reconciliation was utilized for tax cuts and not for the reduction of the deficit. Between 2001 and 2008 Bush W added more than $2.5 trillion in publicly held debt as the administration did not reduce the debt (235). In conclusion, different administrations experience different challenges in dealing with debt and deficit. All the policy strategies mean tradeoffs that lead to simple remedies becoming more complicated than they look. Deficit decrease now implies the imposition of plans that hurt the present GDP and economic recovery while expending debt means an increased proportion of expenditure in the future will be used in debt servicing which may lead to higher taxes. Every regime has its political issues, and constituent constraints that it takes into consideration which contributes to the challenge of coming up with a deficit and a debt solution strategy. However, these challenges have solutions as long as the policymakers consider a long-term plan in their legislation and are willing to make compromises. Works Cited Ippolito, Dennis S. Deficits, Debt, and the New Politics of Tax Policy. Cambridge University Press, 2012. Smith, Adam. "An inquiry into the nature and causes of the wealth of nations. An electronic classics series publication." online].[cit. 2013-30-03]. Dostupné na:< http://www. mises. cz/database/clanky/51_19_Marx% 20jak% 20ho% 20m% C3% A1lokdo% 20zn% C3% A1. pdf (1776). Steuerle, C. Eugene. Contemporary US tax policy. The Urban Insitute, 2008.


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