A tax is a financial charge levied upon individuals and entities’ incomes by the state. Taxes are mandatory in every economy for governments to be able to finance basic provisions such as for their citizens. These are security, employment, health care, infrastructure such as roads, and other socio-economic programs just to mention a few. Though taxes are unpopular with the masses, the idea of raising taxes on corporations has both advantages and its disadvantages. With the current fiscal cliff challenge brought about by the expiry of the Bush Tax Cut facing the U.S. economy, democrats argue that tax increments are necessary for the government to continue funding vital services and to reduce the budget deficit. Republicans on the other hand are opposed to the Obama’s administration idea of implementing tax increments, especially on individuals and entities earning more than $200,000 and $ 250,000 respectively.
Q.1 The advantages of raising taxes include the obvious increased revenues. The funds help to finance public programs that are beneficial to the majority such as the social security and Medicare programs. The so-called sin taxes levied on alcoholic and tobacco products offer benefits such as improved health because they discourage the consumption of highly priced recreational drugs. In addition, tax increments can help to alleviate budget deficits and the problems of high debt (Feldstein, Hines & Hubbard, 1995). High taxes discourage individuals and institutions from borrowing. According to the center for Budget and Policy Priorities, out of the 50 states in the United States, 48 were having budget shortfalls totaling $148 billion as of the end of 2010. Lastly, increasing of the federal corporate Income Tax rate helps in redistributing wealth between the rich who own profitable companies, and the less fortunate citizens.
On the other hand, increased taxation has its own pitfalls. For instance, it discourages the growth of industries affected by the tax increments. Increased taxes are a disincentive to investment because investors believe they will earn smaller returns, or even register losses on their investment. In addition, taxing manufacturing entities causes them to raise the prices of their products so that they maintain their profit margin. This in turn leads to increased cost of living, as citizens have to part with more money to pay for basic goods. Increased taxation encourages multi-nationals to set-up their businesses in foreign nations where tax rates are low (Feldstein, Hines & Hubbard, 1995). This results to lost jobs for the U.S. citizens. Higher taxes may cause an economy to enter a permanent form of recession because fewer funds circulate among businesses and the citizens.
As a Chief Financial Officer of a publicly traded company, I would recommend the federal government to reduce the Federal Corporate Income Tax Rate. My primary interest is to see the shareholders of the publicly traded company are paid dividends. This will provide an incentive to investors and encourage Investment activities. Consequently, more jobs will be created and productions activities will follow suit. The excess production can be exported and this will help to bring a form of balanced payments, which goes a long way towards reducing the budget deficit.
Q.2 Excessive federal regulations are likely to have the same impact as increased taxes. This is because they increase government control in various sectors of the socio-economic and political sphere. The increased regulations result to shift of power from the people towards their elected government. In turn, the government is susceptible to abuse its powers by funding policies and subsidizing industries that interest those at the helm of power who seek to extend their political influence (Mankiw, 2012). The downside is that increased regulations discourage investors from opening entities. Those businesses that cannot cope with the increased regulations flee the economy and seek to re-establish in friendly states that have favorable regulations. The impact is the same as increased taxes, which is loss of jobs.
Q. 3 Concisely, a perfect capital market is one that lacks arbitrage opportunities. The model for a perfect capital market, the Efficient Market Hypothesis describes the conditions of a capital market. It assumes there is no a central regulating authority and that agents or participants are perfectly rational in their buying and selling of securities. The market experiences perfect competition in the securities and product markets. The participants receive crucial market information simultaneously and this information is costless. In addition, all the participants pursue utility maximization (Chandra, 2008, p. 279). These are the postulations of the Efficient Market Hypothesis theory and we will now briefly compare today’s markets, specifically the U.S. capital market and determine whether it fits these characteristics.
Q.4 The super storm sandy refers to the hurricane that swept the mid-Atlantic, the Caribbean, and Northeastern United States with devastating consequences during late October 2012. The hurricane left 253 persons dead, and losses due to damages and interruption of business in the U.S. alone are estimated at $ 63 billion. Free-market economists argue that the reconstruction activities that will follow suit are likely to stimulate the economy. They argue that destruction caused by war and natural disasters can actually turn beneficial to the economy because increased government spending on reconstruction will have a multiplier effect on the economy (Mankiw, 2012, p. 770). Consequently, this leads to advancements in newer technologies and increased production that lowers unemployment.
However, this postulation does not reconcile with the view held by Frederic Bastiat, a French economist who coined the parable of the broken window. His parable argues that opportunity costs and the law of unintended consequences affect the economy negatively in ways that are unseen (Skousen, 2009, p. 64). Therefore, in the case of the damage caused by Super Storm Sandy, Billions of dollars that would be spent on reconstruction will not be used on health care, food, clothing and other social programs beneficial to the U.S. citizens. Therefore, the stimulation of economic activity comes at a price. This is the lack of provision of essential social welfare programs because government money is spent on reconstruction.
Chandra, P. (2008). Investment analysis and portfolio management (3rd Ed). New Delhi.: Tata McGraw-Hill.
Feldstein, M. S., Hines, J. R., & Hubbard, R. G. (1995). The effects of taxation on multinational corporations. Chicago: University of Chicago Press.
Mankiw, N. G. (2012). Principles of economics (6th ed.). Australia: Southwestern Cengage Learning.
Skousen, M. (2009). The making of modern economics: the lives and ideas of the great thinkers (2nd Ed). Armonk, N.Y.: M.E. Sharpe.