Article Review
Article 1
Published on: October 22, 2014
The Summary
The tax cut policy followed by Kansas has led to a shortfall in the revenue this year. The tax revenue collected in the fiscal year 2014 was $700 million less than that of the previous year. According to the director of taxation Steve Slotts, this revenue shortfall is temporary in nature. This temporary deficit is being met through the expenditures from the reserve fund. But the revenue shortfall in the first three months of the fiscal year 2015 that began in July 2014, suggests that this shortfall is permanent. The exemption of the ‘pass-through income’ from taxation has been cited as the major cause of this recent shortfall. In most of the US states, there is no tax at the corporate level. Instead, the tax is collected as a profit tax from the owners. This is termed as a tax on pass-through income. In Kansas this pass-through income tax has been abolished. This has led to a tendency by small businesses to show most of their income as profits and less as salary. By showing more income from profit they get exempted from paying the tax. But the revenue earned from the corporate income tax has increased for Kansas. It is expected that the revenue will increase in future with the rise in income in the state unless further tax cuts are declared.
The Analysis
Analyzing this tax cut policy we find that this will lead to a rightward shift in the AD curve from AD0 to AD1 leading to rise in income from Y0 to Y1 as shown in figure 1. This rise in income will further increase employment. The rise in employment and output will raise the tax revenue in Kansas and reduce the deficit in the budget.
Figure 1
P
SRAS
P1
P0
AD1
AD0
Y0 Y1 Y
We can also observe from the diagram that the rise in output is accompanied by a rise in the aggregate price level. So, this tax cut policy is likely to create an inflationary situation in the economy.
The article expresses concerns about the revenue shortfall that Kansas is facing presently and terms the shortfall as permanent. But to give a boost to production and growth of the economy such tax cut is necessary. Moreover the abolition of the pass through tax will induce more business activities and more profits will be generated. The increased business activity will mean more jobs created and higher income level. This increase in income is reflected in a rise in the corporate tax revenue. It is expected that such a policy will increase income in the future and close the revenue- expenditure gap.
Article 2
Published on: October 22, 2014.
The Summary
The Fed has been following an expansionary monetary policy for the last few years. It has been increasing the supply of real balances through the open market operations. This program of buying bonds in the open market has pumped in around $3.5 trillion since 2008 into the receding economy. It is clear that such a stand was taken to revive the economy from the financial crisis of 2007. The increase in the money supply has helped the economy to follow the path of recovery and inhaled health into the financial sector. The open market operations will be wound up at the end of October, 2014. But the next step for the Fed would be to decide on the interest rates. The interest rates have been kept low for a long period of time. But the decision to raise the rates will depend on the performance of the economy in terms of inflation rates and the rate of economic growth. As of now, there is no sign of rise in the wages or prices. The inflation is at 1.5% which is well below the targeted rate of 2%. But there is a pressure from the interest groups and political factions to raise the rates. The bond holders, consisting of financial institutions, investment agencies, and also individuals with considerable financial strength, prefer a rise in the rates so that inflation is curbed. A curb in inflation will be for their gain as their bond values will come down. But the fed’s decision should depend upon the requirement of the economy. The US economy has not yet picked up a desired growth rate and employment level. The credit flow is also quite low. So there is no fear of a disturbing inflationary rate in near future. The Fed has rightly deferred its decision to hike rates till the middle of 2015.
The Analysis
The expansionary monetary policy of the Fed can be viewed as a rightward shift in the AD curve from AD0 to AD1 leading to a rise in income from Y0 to Y1 as shown in figure 2. This expansion has lead to a price rise from P1 to P2. The price rise suggests an inflationary trend but the inflation rate has not yet crossed the targets. So there no reason that the Fed should increase rates. An increase in the interest rates will shift the AD curve to the left and lead to a fall in income and prices.
Figure 2
P
SRAS
P1
P0
AD1
AD0
Y0 Y1 Y
The opinion expressed in the article is perfectly in consonance with economic theory. There is no reason for the Fed to hike rates unless the inflation takes an alarming proportion. The economy still requires some monetary boosting to reach the desired pace of growth. The wage and employment rate is still low enough for the Fed to keep low interest rates that will increase the credit flow in the economy and boost economic growth.
References
New York Times, October 22, 2014. Kansas Faces Additional Revenue Shortfalls After Tax Cuts
The New York Times, October 22, 2014. The Fed at the Crossroads. By the Editorial Board
