Government's Economic Policy

In 2003, the Internal Revenue Service began to mail out refund checks because of a change in the tax law. Economic forecasters predicted that consumption and GDP would increase because of higher refunds on income taxes.

Pretend as if you are an economist and explain your thoughts on whether the tax cuts from the past few years have been successful in promoting economic growth or in preventing a deeper decline? Are there other changes to fiscal policy that you feel would have been more successful?

The two most significant areas of the government's economic policy are Fiscal Policy and Monetary Policy. Their purposes are to sustain economic growth, decrease unemployment and control inflation. Fiscal policies is best defined as the changes in taxes and spending that affect the level of Gross Domestic Product (GDP) to stabilize the economy. (O'Sullivan and Sheffrin, 2006, pg. 547).

In 2003 the tax law changed to include a child tax credit. The Jobs and Growth Tax Relief Reconciliation Act of 2003 raised the Child Tax Credit to a maximum of $1,000 per child from $600 per child. The internal Revenue Serviced mailed refund checks to the qualified individuals. (Internal Revenue Service May 2003) It seems like there has been great debate whether the tax cuts of 2003 did any good.

Most economic analyses suggest that the tax cuts have had some positive effect on the economy in the short run -- at issue is the extent of this positive effect given their cost. The overall summary stated that there was no difference on spending response out of the "mailed out" child credit refund checks, and the reduction of withholding taxes. Further studies found that this child credit did increase the amount of expendable income but many stated that it did not stimulate spending. It was found that only 25% or less would actually spend the money they received. To their astonishment, even the low income households were not any more likely to spend the rebate than the higher income families. Based on their results, the tax rebates had only limited success in stimulating the aggregate demand. (Shapiro & Slemrod, 2003, vol.93, no.1, pg.381-396).

To summarize, a better way to control spending would be to account more accurately for retirement and the definition of current policy, along the lines discussed above. Like tax cuts, this would reduce the