A23. February 18, 2008. http://www.taxhistory.org/thp/readings.nsf/cf7c9c870b600b9585256df80075b9dd/9de7fcd59915a3be85256e430079327d?OpenDocument Question

After 9/11, the Federal Reserve Bank, then led by Alan Greenspan, used monetary policy reduced the interest rate, or the rate that consumers must pay to borrow money. This did encourage individuals to spend more. However, it is still debatable if this was the most vital component in extricating America from the throws of economic recession. Government spending, or fiscal as opposed to monetary policy, is often seen as a more direct and superior way to rapidly change economic conditions. Fiscal policy was required to stimulate America's recovery from the Great Depression, according to conventional wisdom, although some still argue that it was the Hoover administration's monetary policy that was ineffective, not that monetary policy was ineffective altogether.

But most economists believe that, to get the economy 'moving' again, spending by the government works -- there is no question about it, whether spending on infrastructure, as occurred during the New Deal or on armaments during World War II. Arguably, the spending on public works is not simply a stimulus for individuals to spend more and make them secure in their jobs, but can make private commerce more effective. However, the government may run into problems if it spends too much during times of prosperity, and then must deal with the bureaucratic 'fall out' of having to cut back pet projects and programs. In other words, government spending is a difficult genie to put back in the bottle, although it has been a necessary genie, given that monetary policy alone may be ineffective. Also, if the government's spending is not managed wisely, it can 'tip' the economy into inflation. Theoretically, the government can cut back to hem in inflation, but this is not always politically feasible. And finally, "the effects of any fiscal policy are not the same on everyone. Depending on the political orientations and goals of the policymakers, a tax cut could affect only the middle class, which is typically the largest economic group. In times of economic decline and rising taxation, it is this same group that may have to pay more taxes than the wealthier upper class' (Heakal 2008)

Works Cited

Heakal, Reem. "What is fiscal policy?" Investopedia. October 22, 2008. http://www.investopedia.com/articles/04/051904.asp

Question

Fairness does matter when creating a tax system. In terms...

While for a wealthy individual, much of his income can be locked up in assets, making money off of money, for a poor individual, the bulk of his or her income is devoted to buying necessary goods, including rent and food. The consumption tax taxes everyone equally on the surface, regardless of how someone has benefited from the economic system of a particular society, and actually favors those who can allocate their income to sectors of the economy that are not taxed (such as investments, which are not technically consumption).
A flat tax, where everyone pays the same amount, has similar problems in terms of allocating wealth. 15% of a poor person's income, a person who must pay for his or her rent, food, and necessities out of his or her weekly paycheck, means more to that individual than 15% of an income where much of that income can be devoted to investments and luxuries. While not as unfair as a consumption tax as investment income is also taxed, a flat tax is still unfair, and finding the right percentage to finance government operations yet not to be prohibitively costly for the poorest members of society is a difficult balance to strike. The only good thing about the flat tax is its simplicity, as along with the consumption tax as it requires less bureaucracy to enforce. Bureaucracy is expensive as well as frustrating (as anyone who has ever had to fill out a tax form beyond the standard EZ-file well knows!).

The progressive tax, while not perfect, is messier, but like democracy itself, some messiness must be tolerated for a more fair system. By gradating the tax brackets, legislators have more tools to tinker with, so they can increase the burden of taxes upon the rich if society becomes too concentrated at the top in terms of its wealth, and redistribute that wealth to the bottom. Deductions on income tax forms allow legislators to favor certain business practices (such as staring up a company in an underprivileged area) and behaviors (like saving for retirement) than others. The progressive system of taxation is ultimately better for all, because the poorest do not become so poor as to become a burden upon society, in terms of class-based anger and the multiple psychological and physical illnesses of society, and so that they can continue to remain a functional part of the economy, funneling their dollars to keep the economy 'alive' by consuming goods and services as well as providing them to others.