Quiz 17: Globally Free Markets for the Twenty-First Century


The liberals are more concerned about the equity issue, the disparity between poor and the richer section of the economy. Liberals are in favor with government taxes and spending, as long as the taxes heavily burdened the poor and the middle class. The Liberals would be in favor of fiscal policy that increases the government purchase especially for domestic social programs and transfers. They do not believe in deregulating the businesses. On the other hand, the conservative would prefer supply side policy and monetary policy that lowers the interest rate. They will also prefer fiscal policy that reduces taxes and spends more on national defense. They will put stress to deregulate the business and decreasing the government tax rates. As the conservative does not want the transfer of income from private hand to the government they argue for decreasing taxes. They also argue the negative incentive effect of taxes. Huge spending by government was always a concern for the conservatives because the government spending crowds out private spending and increase interest rate. Thus, the conservatives are more concern about incentives and efficiency.

Government use fiscal and monetary policy as well as supply side policy to put the economy either in an expansionary or contractionary path. Though, the effect of these policies can me same, there is significant debate over the type of policy to be used. Among these the supply side policy emphasis on the cutting down the personal income tax of the higher income class and cutting down the transfer payments to the poor. The advocates of the policy argue that the supply side policy will generate economic growth and the benefits of which will "trickle down" to all. The trickle-down effect has its limitations, because the supply side effect on the real GDP neither guarantees the magnitude of the effect nor projects the length of the period to get its benefit. As the higher income person saves more and the lower income people consume more, a reduction in income taxes of higher income people will increase investment in the economy. The firm will produce more. As the lower income class consumes more and the government cut down the transfers, there will be not enough demand for those newly produced goods. The inventory would pile up and the firm will experience loss. This will prompt them to lay off workers. The economy will experience higher unemployment rate. Hence, we can conclude that highly volatile nature of the supply side policy also makes the trickle down part volatile and unpredictable.

Government imposes taxes to finance its programs. Government taxes come in various forms and are imposed by the federal government as well as by state and local government. Imposition of taxes has different effects on macro economy as well as on the income distribution. According to redistributive effect of taxes there are three basic types of taxes: progressive taxes, proportional taxes and regressive taxes. Capital gains refer to the net income received when an asset is bought at certain price and sold at a higher price. The income form capital gain is taxable. Since higher income people tend to receive by far more capital gains than low income people, reduction in capital gains tax would largely benefit high income people. Reducing the capital gain tax theoretically increase the incentives to invest more as the wealthiest part of America receive capital gain as investment earning. The reduction in taxes will generate more capital through increased investment and will contribute to economic growth. Since higher income people tend to receive by far more capital gains than low income people, reduction in capital gains tax would largely benefit high income people. Thus, a reduction in capital gain tax will redistribute the income in favor of higher income people and implies a more unequal distribution of income.

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