Fiscal policy uses government spending levels and tax rates to influence the economy. Policy makers use fiscal policy find a level of public spending that stimulates economic demand without creating an excessive tax burden on citizens and businesses.

“Reaganomy”

Ronald Reagan promoted economic growth by reducing tax levels with policies based on “supply side” Or “runoff“the economy, nicknamed”Reaganomics” Reagonomics argued that high-income taxpayers receiving tax cuts would spend more and invest in businesses, thereby spurring economic expansion and job growth. Reagan incorporated the economic theories of Arthur Laffer, who summarized the hypothesis in a graph known as “Laffer curve“Congress agreed to an overall rate cut of 25 percent at the end of 1981 and indexed rates for inflation in 1985.

Initially, inflation was revived and the Federal Reserve rising interest rates. This caused a recession this lasted about two years. But once inflation was controlled, the economy grew and 16.5 million jobs were created during Reagan’s two terms. However, the national debt increased. While gross domestic product (GDP) grew about 34% during Reagan’s presidency, it is impossible to determine how much of that growth was due to tax cuts versus deficit spending.

Clinton years

Under President Bill Clinton, the Omnibus Budget Reconciliation Act was passed in 1993 and included a series of tax increases. He climbed to the top income tax rate at 36%, with an additional increase of 10% for higher incomes.

He removed the income cap Health insurance taxes, gradual elimination of certain itemized deductions and exemptions, increased the taxable amount of Social securityand increased the corporate tax rate to 35%.During the Clinton presidency, the economy created approximately 18.6 million jobs. The stock market experienced a sharp rise bull run, like S&P 500 Index increased by 210%.

By 1997, unemployment had fallen to 5.3% and the Republicans adopted the Taxpayer Relief Act. This law reduced the maximum rate of capital gains from 28% to 20%, established a fee of $500 child tax creditexempted a married couple $500,000 from capital gains on the sale of a main residence, and noted the inheritance tax exemption from $600,000 to $1 million. He also created Roth IRA And IRA for Education and increased the income limits for deductible IRAs.

Politics under President Obama

President Barack Obama has consistently advocated raising taxes on the wealthy to help them. reduce the deficit. He also fought for and passed major tax breaks for working families and small businesses. For the typical middle-class family, tax cuts totaled $3,600 over the first four years.

Although President Obama has targeted new savings opportunities like the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC) for working families, and the American Opportunity Tax Credit ( AOTC) for university tuition, to provide about 24 million working and middle-class families with a tax cut of about $1,000 per year, the national deficit has increased over its eight years mandate, increasing from $7.5 trillion in 2009 to $14.1 trillion in 2016.

Trump’s Tax Cuts and Jobs Act

President Trump signed the Tax Cuts and Jobs Act (TCJA) came into effect on December 22, 2017, with significant changes to the tax code. The law reduced marginal effective tax rates on new investments and narrowed rate differences across asset types, financing methods, and organizational forms.

The TCJA included $5.5 trillion in gross tax cuts, with nearly 60% going to families. The economy grew faster after 2017 than expected before the TCJA, but studies show it significantly reduced federal revenues compared to what would have been generated without the TCJA. However, in the third quarter of 2020, real GDP grew at an annualized rate of 33.1%, doubling a previous record set seventy years earlier.

President Biden’s proposals

President Biden’s budget for fiscal year 2024 includes tax increases that would target high-income businesses and individuals and capture $4.8 trillion. According to the Tax Foundation, the budget would reduce economic output by about 1.3% in the long term and eliminate 335,000 full-time jobs. However, the Office of Management and Budget (OMB) estimates that the FY 2024 budget would reduce the debt/GDP ratio by seven percentage points.

The essentials

Economists and policymakers debate whether higher rates lead to increased tax revenue. Fiscal policy attempts to strike a balance between government spending levels and tax rates to influence the economy as measured by the tax/GDP ratio. In a constant balancing act, policymakers must weigh new taxes against losses the company might face because of these taxes. Rate changes change behavior and taxpayers generally strive to minimize their tax burden.