By: Dr. Lynn Reaser
The U.S. economy seems to be doing better, but we have followed a “zigzag” pattern for the past five years, with periods of faster growth followed by slowdowns. Monetary policy has pulled out “all the stops” and is now starting to gently pull back.
Approximately 10 million people are unemployed while another 7.5 million have only been able to find part-time work in the United States. Employees with full-time positions have seen their wages only barely keep pace with inflation during the past year.
Is it time for fiscal policy to address the issue of slack in the labor market? One thought might be to pare back income tax rates across the board, putting money in the pockets of all workers. Reductions in personal income tax rate cuts always increase economic activity as they lead to higher incentives to work, spend, and invest. Economic activity would receive a boost.
The question regarding the advisability of such cuts involves two major issues: financial sustainability and equity. While the deficit has fallen from over $1.0 trillion to about $500 billion, this is only a brief respite. Increases in social security, medicate, and general health care spending will soon start to balloon the deficit, which could be exacerbated by large tax cuts. Lower tax rates for the rich could also inflame social tensions about income inequality.
As a result, with political capital short in Washington, tax reform might be a better hill to scale.
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