Fiscal policy and government debt Coursework Example | Topics and Well Written Essays - 2250 words

Fiscal policy and government debt - Coursework Example Through empirical tests, guided by the above representations, Romer and Romer (2010) conclude that irrespective of the given legislation, significant changes in an economy’s tax policy brings about a dominant motivation that fits into the following categories making up for increases in government expenditure, addressing an inherited government deficit and spurring long-term growth (799). Further, the findings illustrate that tax changes largely influence output. The baseline specification implies that one percent of GDP will lower real GDP by almost three percent. Additionally, changes in taxation are very much related to future changes, further, investments decline significantly following exogenous tax increases. Lastly, the study concluded that tax increases to reduce an inherited budget deficit do not have the large output costs associated with other exogenous tax increases. The observation, which points to the fact that improved welfare results from tax cuts are largely a position confounded by the New Keynesian multipliers which indicate that a tax cut should increase welfare mainly because it frees up private resources for spending. This thought is only countered by the initial Keynesian multipliers which have since been replaced by the more contemporary thought (Tsoukis, 2010). Therefore, it seems safe to base thoughts of tax policy changes on the view represented in this study. The main argument in this regard is that higher taxation acts as a disincentive to individuals and firms to work and invest.