An Analysis of the Effects of Marginal Tax Cuts

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AN ANALYSIS OF THE EFFECTS OF MARGINAL TAX CUTS
SAYANTAN MITRA
In my last paper, I argued in favor of the across-the-board tax-cuts proposed by the Republican presidential candidate Mitt Romney. With the help of instances from both micro as well as macroeconomics, I showed how a reduction in marginal and corporate taxes was beneficial for the economy. I used the growth in Gross Domestic Product (GDP) as a measure of the positive direction which the economy would take as a result of tax-cuts. I used empirical evidence to show that the tax-cuts on previous occasions have resulted in economic growth and increase in GDP of the United States. My detailed arguments and results can be found in the Appendix. In this paper I will analyze the effects of marginal tax-cuts on the different income groups, the high income and low income households. I will also analyze the variations in marginal propensity to save taking account demographic characteristics such as age group and education level as well as income. This would aid in an analysis of which portions of the population would be benefitted from a tax-cut. Therefore, I would like to would policy prescriptions for cutting taxes.
When there is a reduction in payroll tax rates, it can have different effects on the different parts of the population. For low-income households, a tax-cut would encourage them to work for more hours. On the other hand, for high-income households, it may lead to them working lesser. These can be explained by the backward-bending supply curve for labor.
A low-income individual’s disposable income increases when the tax rate is reduced. This causes the disposable wage rate to go up as well. Thus, he gets to keep more than he previously could from working for an hour. Therefore, he wants to substitute his leisure time for labor. So he puts in more hours of labor. A high-income individual’s…...

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