Tuesday, November 29, 2011
Tax policies and people’s living standard
Is tax cut conducive to economic development? Can tax reduction improve people’s living standard? When should governments reduce taxes? What effects, in the short run and in the long run, will tax cutting have in economy?
Shocked by the profound harmful influence the current European sovereign crisis exerts on the global financial markets, I can’t help contemplating how come euro-countries’ governments had themselves entangled into such an economic black hole. What allured Italy’s, Greece’s, and Spain’s governments to run an extremely high budget deficit risk? Facts tell that most European countries, during the past several decades, have invested enormous funds in public infrastructures while providing their citizens myriad and large benefits and tax credits. The aforementioned massive spending, which EU governments might believe instrumental to promote the quality people’s lives, consumes governments’ savings in a lightning speed. In the long term, when the saving diminishes, both the steady-state capital per labor and the income per labor will shrink. Thus, people’s living standard becomes worse off.
However, in the short run, tax cutting can be a good choice to placate people’s tough lives, especially for countries that have a high inflation rate like China. People’s living standard in China falters because of the seemingly infinite increase in inflation. Simultaneously, China’s currency yuan has been continuously enforced to appreciate, seriously undermining China’s exports and shaking China’s high growing economy. The appreciation of yuan attracts numerous foreign investors, resulting in the influx of large amounts of hot money. Facing the high demand of yuan, China’s government is reluctant to control money supply; otherwise, the value of yuan will be further escalated for the incremental gap between demand and supply. But the aggravating inflation worsens people’ lives. Different with European countries, China’s government is not in a great debt. If monetary policies are stuck, why not try the fiscal policies to soften people’s predicament. Therefore, I here propose to reduce taxes in the short run to stimulate the income growth and to boost people’s living standard.
“Too much is as hazardous as too little.” Likewise, tax reduction can either be beneficial or be detrimental. It depends on the special economic state a particular country is in. It should also involve the consideration of the effects during different time length; commonly, tax reduction plays a positive role in improving people’s living standard in the short term but converse in the long term.