Part of the allure of using fiscal policy to stabilize the economy is that the government can use ‘automatic stabilizers’ such as the federal progressive income tax, the corporate income tax, and unemployment insurance. When the economy is booming, taxes rise since they are an increasing percentage of income or profits in the case of corporations. Unemployment insurance, as well as the income tax works to increase consumption during recessions as taxes fall and consumption is supported by unemployment benefits. Over the past 50 years tax rates have converged between the high and low-income groups.
The possibility of tax reform and unemployment benefit expansion is always a possible political/economic debate. Many economists (like Robert H. Frank) and politicians (like Ron Paul) advocate changing the income tax system to a flat-tax system or a consumption tax. Other groups advocate expanding unemployment insurance to help lower-income workers during downturns.
I would like you to think about the usefulness of the current policies and the impact of the proposed changes on the economy.
Questions you might try to answer:
- If taxes were only based on consumption, would this help to stabilize the economy in the same way that income taxes are currently designed to help?
- If unemployment benefits are expanded, what would be the immediate and long run impact on the economy if the Keynesian model?
- If taxes were flat rather than progressive, what impact would this have on the economy?
Remember… I would like your statements to be as subjective as possible, or in jargon terms, positive and not normative in nature. Also, remember, I want you to keep your descriptions short, basic, and related to classroom content. Read other students comments before posting, and please leave your name with your posting.