Term Paper on "Public Debt and Tax Cut"

Term Paper 5 pages (2183 words) Sources: 1+

[EXCERPT] . . . .

Public Debt and Tax Cut debt that has been accumulated by the Federal Government in either its Treasury or in its Financing Bank is referred to as a 'Public Debt'. The debt could have been incurred by either the selling of 'securities' and bonds to the public, or through the borrowing of funds from a Federal account. A public debt can also be defined as the total amount that the Federal Government has accrued due to all its borrowings in the past. (Definition of Public Debt) Federal Debt, on the other hand, can be defined as the total amount of debt that is owed by the Federal Government that is as yet unpaid. A federal debt can consist of both public debt and agency debt. A federal debt is made up of the funds owed to the Treasury, in the form of Treasury Bills, Treasury Notes, and also Treasury Bonds.

There is generally a ceiling or a limit on federal debts, which has been imposed by the Congress, and when accumulated debts are on the verge of touching the ceiling, the ceiling has been raised, on several occasions, though not very often. While public debt is the portion of the federal debt that has been borrowed from the Treasury directly from the public, the federal debt is one that is made up of both the public debt and the agency debt, and while public debt is one that has been accrued by the federal government by its act of borrowing funds from the Treasury or the Federal financing Bank that has funds of the public, agency debt is one that has been accrued by the federal government when a federal agency other than the Treasury of the FFB is allowed to borrow funds from the public or from another authorized account. (Definition of Federal Debt)

In the year 2001, Robert J. Barro wrote that the time had arrived to impose Tax Cuts, and that all the talks that had been going on concerning the issue in Washington had set the climate for a tax cut. He said that the federal surpluses were huge and this made the possibility of the withdrawal of the public debt a real possibility. To illustrate the point, the example of a fiscal incident that had occurred in the year 1853 was quoted. In this particular situation, the entire national debt had been paid off, because the fact that there was a surplus was true, and this made it easier to sort out the debt. Increasing federal expenditure decreased surplus, and the additional expenses were routed partly through the states, partly through public works, and for fighting Indians in the state of Florida. The entire episode was managed without tax cuts. The recession that followed later, in the year 1837 served to decrease tax revenues that originally came from public sales of land and also from tariffs. (Boy, we really need a Tax Cut)

After this particular incident, there has been absolutely no reason for the exhaustion of public debt, and there has been no cause for worry for the past 165 years. It was in the year 2001 that the matter of tax cuts and public debts came into the picture again, and it was actually brought up by the Federal Reserve Chairman, Alan Greenspan, when he declared that he was an advocate for 'tax cuts'. He offered the opinion that the results of maintaining surpluses after the limit to which public debts can be reached must be addressed, and when this is done, he felt, the taxes would be reduced. When taxes are reduced, there would be no need for added expenditure to fight inadequate public debts. He then added that permitting the Social Security Trust Fund to spend or invest their funds in corporate stocks ad other forms of securities could protect the publicly held government bonds. This also meant that it would be politically right if the funds were all invested in several personal accounts, rather than in a portfolio managed by the government. (Boy, we really need a Tax Cut)

Furthermore, a tax cut would lessen tax distortions and would also serve to increase funds for long-term investments and the future economic growth of the country. Tax cuts would also encourage the individual to work and save and finally, invest his money. Yet another benefit of tax cuts would be that in this manner, there would be less money for the Congress in Washington to spend if money were to be removed from there. The president of the United States in the 1980's, Ronald Reagan, had in fact understood this concept and had tried to advocate income tax cuts at that time. However, it was not implemented, and in the year 2001, it needed to be implemented as of immediate effect, in order to avoid a 'recession'. (Boy, we really need a Tax Cut)

This resulted in the President, George Bush, signing the 'Economic Growth and Tax Relief Reconciliation Act' in the same year, 2001. This act is generally referred to as the EGTRRA. It was found after intense research that the EGTRAA would help to reduce the vastness of the present and the future economy of the United States of America that it would increase rates of interest, make the taxes more regressive and also more complex, and prove to be indefensible, fiscally. All this was found to be prompting the country into taking unnecessary risks, and it was suggested that the legislation to bring on tax cuts be changed by the Congress. This did not happen however, and President Bush signed the document. The various principles and policies brought out by EGTRAA are as follows: it served to cut the highest income tax rates by 3 percentage points, meaning that the 28 and 31 and the 36% rates all fell by 3 points while the 39.6% rates fell to less than 35%. (the Bush Tax Cut: One Year Later) new tax bracket of 10% was created out of the 15%, and this was available almost immediately, as compared to the higher income taxes that were to be gradually phased in. The EGTRAA also served to bring down the various marriage penalties, and to increase the 'Child Credit' and the 'Earned Income Tax Credit'. All subsidies allowed for the purpose of education and savings for retirement were to be increased, while limits on itemized reductions were to be repealed. All this would, it was hoped, provide a relief for all citizens from the 'Alternative Minimum Tax' that was originally passed to reduce the system of 'tax sheltering' but actually served to affect large families that was paying high income taxes already. EGTRAA has been designed to stop being legitimate at the end of the year 2010, and this raises doubts as to its efficacy, since this would mean that it would end leaving a lot of unfinished loose ends whereby all the provisions that had not been phased out at that time would be repealed, and the tax code would go back to its original form as it was before the new tax revision was passed. The EGTRAA would also serve to increase the number of individuals who have to adhere to the Alternative Minimum Tax to the figure of 35 million by the end of 2010, from the original number of 2 million. (the Bush Tax Cut: One Year Later)

The members of the AFSCME feel that the Bush Tax has affected them very negatively, as it has served to limit their ability to focus on important national issues for quite a few years, because of the fact that the Tax Act includes all the provisions that would favor the rich and wealthy, and would add more new tax cuts gradually, and all this would make the final bill more expensive than what even George Bush had intended for it to be. The end result would be that all working families would be severely affected by the plan. Furthermore, its impact on the issue of Public Debt is also one of concern. It is a fact that the huge federal tax cut would put immense pressure on the state budgets that are even otherwise showing that they are not able to cope with the varying issues of a gradually slowing economy, the effects of other past state tax cuts, and the ever increasing expenses for the purpose of 'Medicaid'. (the Impact of the Bush Tax Cut on Working Families)

It is also true that most of the states of America, especially those in the South of North America, had already reduced their spending plans for the year 2001 to the tune of $1.6 billion by the middle of the year, because of the shortage of revenues. The fact that the new Tax Cut would repeal the Estate Tax is also a matter of concern, especially because most states generally share this revenue with the federal government. This loss would amount to a 1.5% of their tax collections, depending on… READ MORE

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