How Taxes Can Affect The Yonkers Economy In The Long Run
The economy can dictate a lot of things. Economic activity is essentially a reflection of what consumers, businesses, and governments wish to buy or sell. In short, the factor of demand plays a big role. Over the long haul, supply is what dictates overall economic potential. The size and skill of the workforce are what dictates our productive capacity which includes everything from the efficiency of our machines, the total number of and quality of our buildings, computers, vehicles, and other physical capital that is used.
Taxes can ultimately affect everything from the supply to the demand through incentivizing consumers. Minimizing marginal tax rates on both salaries and wages can help provide an incentive for people to work more. Whereas, improving upon the earned income tax credit will bring many more people into the workforce who are deemed low-skilled. By minimizing marginal tax rates on returns of assets can really encourage more investing and saving. Whereas, minimizing the marginal tax rates on the income of businesses can result in companies investing more domestically instead of taking their money abroad. By providing tax breaks on research and development, you can encourage many more new ideas which can help to provide a pillar for the economy to grow.
That being said, providing tax reductions can also have a negative impact on the supply channels. For instance, if a tax cut increases a worker’s income after taxes, they might decide they can do without working as hard and they might spend more time doing leisure activities. This type of increased income effect can work against what is known as the “substitution effect,” which provide more incentive through financial reward to work more.
Providing tax cuts can end up slowing down the economy as a whole by increasing the total amount of budget deficits that exist. When the economy is operating at its peak efficiency, government borrowing can be financed by pushing capital that would have otherwise gone into private investments or by bringing in foreign investors and borrowing from them. Therefore, government borrowing can either reduce private investment which can also result in a reduction of productive capacity or it can reduce the total amount of future income that goes to American residents. Regardless, future well being can be reduced by budget deficits.
Tax policies can have long term consequences that not only depend on the incentive efforts but also on the various effects of the budget. If Congress works to reduce the marginal tax rates on the incomes of individuals, the long term results are either going to be positive or negative based on whether or not the resulting impact on both investment and saving trump the potential consequences that the increased deficits bring.
Putting Everything Together
This ends up leaving a lot of good questions as to how much impact large incentive and deficit effects are and how to effectively model these things. Both the Congressional Budget Office and the Joint Committee on Taxation use various models that alter assumptions about how forward-thinking consumers are, how the country compares and rests within the global economy, and how the borrowing from the government impacts the incentives of private investment. Likewise, how both consumers and businesses react to changes in the tax structure. The one area that many agree on is that the most growth-centric policies are the policies that increase incentives to do everything from work, to save, to invest, and to innovate without causing the deficits to skyrocket.