2 of 21

No

Write now Article Tools

Taxation is eternal question of human society. Many of the revolutions, if not all of them, are thanked to taxation. Tax has critical role in the economy. It is among the most important impact of the government on the economy. Tax cuts are signs of encouraging spending and investing. Tax hikes are signs of discouraging in those areas. There are times for encouraging and discouraging. Thus, cutting taxes does not guarantee anything.

To understand why discouragements are needed, let us examine the two great economic disasters, namely Great Depression and the 2008 economic crisis. Why are they so terrible? In both cases, we see the risky behaviors in investing and spending. The consumers use debts to purchase goods, especially expensive goods such as houses, cars, etc. Investors use debts to lend capital. What are debts, after all? They are faiths. Faiths that one day the consumers will pay up the debts. Or, faith that their houses will be sufficient to pay for the debts. As the economy is built up on debts, it becomes more and more dangerous. When nothing happens, everything seems fine. However, when something does happen, the whole bubble will burst, and the economy will fall freely. The matter is, there will always be something.

Something is usually in the shape of boom-burst cycle of the economy. A market economy always has those cycles, with no exception. The boom cycle is when the economy is doing good, investments increase, more products and services are produced. However, there is a point when there are too many products and services, the supply goes over the demand, and the market bursts. This is the burst cycle: the producers would cut back their productions, the consumers would purchase less, etc. As the supply gradually goes down, it will get below the demand, and allows a new boom cycle to start. The market seeks equilibrium, that is demand equal supply. However, it is impossible to be at that point, so the market will fluctuate around that point, creates those cycles.

Here is the matter: if we goes too far in the boom cycle, in the burst cycle, we will fall very low. This is pretty natural: the higher you jump, the more painful your fall will be. The further the market is pushed over the equilibrium point, the more painful when it falls down. At this point, many people would argue that the market cannot go over the equilibrium point, since there would be no demand out there. Well, in theory, it will not. However, in practice, we have debts, remember?

Debts

• 1
• 2
• 3
• next page >>

Add your voice

Know something about Supply-side economics: Do lower taxes increase a country's economic health??
We want to hear your view. Write now!