How do taxes affect the economy in the short run? Q.How do taxes affect the economy in the short run? A.Primarily through their impact on demand. Tax cuts boost demand by increasing disposable income and by encouraging businesses to hire and invest more. Tax increases do the reverse. These demand effects can be substantial when the economy is weak, but are smaller when it is operating near capacity. Read more about How do taxes affect the economy in the short run?
What characteristics make fiscal stimulus most effective? Q.What characteristics make fiscal stimulus most effective? A.When the economy is operating below its potential, fiscal stimulus can raise output and incomes in the short run. To have the greatest impact with the least long-run cost, the stimulus should be timely, temporary, and targeted. Read more about What characteristics make fiscal stimulus most effective?
How do taxes affect the economy in the long run? Q.How do taxes affect the economy in the long run? A.Primarily through the supply side. High marginal tax rates can discourage work, saving, investment, and innovation, while specific tax preferences can affect the allocation of economic resources. But tax cuts can also slow long-run economic growth by increasing deficits. The long-run effects of tax policies thus depend not only on their incentive effects but also their deficit effects. Read more about How do taxes affect the economy in the long run?
