Thomas Moller is an economist for Econometrics Associates. Mollers supervisor asks him to propose how to reduce the fiscal imbalance. Moller contends that the fiscal imbalance can be reduced by raising income taxes. Mollers colleague, Melissa Stephens, contends that the fiscal imbalance can be reduced by cutting government promised benefits. Regarding the statements by Moller and Stephens, who is correct…
Cutting government promised benefits may be easier, but both will work, I think.
Schweser says correct on both…but doesn’t the tax increasee effect on the fiscal imbalance depend on where we are at on the Laffer curve?
both will work - to get rid of a fiscal deficit, a gov can raise taxes or lower spending.
Still don’t agree… at some higher level of taxation less people will work, GDP will decrease and government revenues will be less. When taking level 1, am I supposed to disregard this relationship ?
There could be all kinds of pros and cons to each measure, and that’s why I think the question is not fair. I assumed cutting government promised benefits may be easier as it only affects some people, not all people, as taxes would. On the other hand, government spending is so big in size that even if you cut those benefits, it won’t reduce the imbalance by much. raising taxes sufficiently will definietly do the job. The Laffer curve impact can also be factored in, but this curve is not usually taken seriously.
Agree with that Dreary…except… Dreary Wrote: > > The Laffer curve impact can also be factored in, > but this curve is not usually taken seriously. tell that to Ronald Reagan
The CFA text is pretty clear that, while they introduce the laffer’s curve concept, they explicit state that the theory is not fully supported. They also are very clear that you need to have a very high tax rate in place for the tax increase to cut revenues based on the proposed shape of the curve.
RIGWDL3 Wrote: ------------------------------------------------------- > Schweser says correct on both…but doesn’t the > tax increasee effect on the fiscal imbalance > depend on where we are at on the Laffer curve? i agree with you. i don’t like the question.
mcf Wrote: ------------------------------------------------------- > The CFA text is pretty clear that, while they > introduce the laffer’s curve concept, they > explicit state that the theory is not fully > supported. > > They also are very clear that you need to have a > very high tax rate in place for the tax increase > to cut revenues based on the proposed shape of the > curve. It may be clear in CFA text, however in real life the laffer curve concept is essential to supply side economics. JFK, Ronald Reagan, Clinton (no cuts but no raises above inflation levels) and GW Bush (not talking about the demand side rebates) utilized tax cuts to increase government revenues. Contrast to Nixon and Carter’s policies. Perhaps I should stop watching Kudlow and Company until after the exam.
RIGWDL3 Wrote: ------------------------------------------------------- > Still don’t agree… at some higher level of > taxation less people will work, GDP will decrease > and government revenues will be less. > > When taking level 1, am I supposed to disregard > this relationship ? Exactly what I was thinking. Especially in todays ever globalizing world, ppl can just move.