Tax reduction is an important part among the reform of the supply front. It would not jeopardize public income and
expenditure if proper measures were taken, for example, broadening tax base,
dealing with the hedge by reducing government non-productive expenditure, etc.
Source: Bing
Historically, the UK and the US used to
adopt the measure of tax reduction to reduce the business cost and stimulate
the economic growth. As a result, the positive effects of the tax reduction are
obvious. It reduced enterprise cost, stimulated enterprise vitality, and
brought about the prosperity of stock market. Of course, there are also some
negative effects, for example, increasing the stress of revenue and expenditure
of government, amplifying government’s fiscal deficits, and deteriorating
income distribution.
In the early 1980s, president Regan
conducted large-scaled tax reduction plan during when he was in power. Facing
the economic stagnation and inflation in the US in 1970s, the measure of
requirements management became gradually ineffective; therefore, tax reduction
appeared in the historical stage as the major measure of the management of
supply front.
From the perspective of the Policy Practice,
the tax reform of 1981 declined the tax rate of the individual income tax and corporate
income tax, shortened depreciable life of fixed assets, and provided enterprise
investment with tax payment privilege.
From the perspective of the effects of the
policy, there are three aspects:
Firstly, the tax reduction of 1981 greatly
reduced enterprise burden, and it made the marginal effective tax rate of the
US dramatically decreased from 37.2% to 26.2%.
Secondly, with the tax revenue has
increased rather than declined, the financial deficits obviously widened. Just
as what the Laffer curve predicted, the reduction of the tax rate did not decrease
the government revenue, instead, it increased the tax revenue due to the
expansion of tax base.
However, with the faster GDP growth stimulated
by the policy than before, the tax revenue to GDP ratio significantly
decreased. Meanwhile, the financial expenditure of the US, especially defense
expenditure, took up a high proportion among the revenue, which caused the
deficit expansion in the US.
Thirdly, the tax reduction stimulated
enterprise investment and economic growth of the US. It stimulated motivation
of individual and enterprise investment, which made the economy of the US perform
better in 1980s than the previous period in terms of investment and economic
growth.
Fourthly, the tax reduction boosted the prosperity
of the US stock market. During the period when the policy was implemented, the
Dow-Jones Average of the US maintained a sustainable prosperity except a
short-term stock market crash in 1987. Meanwhile, the yield of treasury bonds went
up and down during that period of 10 years, which indicated that the major
factor that brought the stock market with prosperity was the enterprise
investment improvement that caused by tax reduction.
In 1980s, when Margaret Thatcher was in
power, the UK also implemented the tax reduction of the management of supply
front.
The individual income tax, corporate income
tax, and the investment-related tax burden have decreased to varying degree. To
hedge the effects arose from the tax reduction, the proportion of the
consumption tax has improved.
From the perspective of the policy effects,
firstly, the tax reduction broadened tax base and accelerated the growth of tax
revenue. However, as the policy stimulated faster GDP growth, the tax revenue
to GDP ratio significantly decreased, which means the enterprise tax burden
reduced.
Secondly, the UK has not suffered the disastrous
consequences of the US financial deficits expansion as the UK government
reduced government non-productive expenditure and increased consumption tax so
as to hedge the tax reduction to government revenue strike. These measures
brought the UK government with financial deficits shrink and even the financial
surplus in the later stage.
Thirdly, tax reduction helped UK’s economy maintains
sustainable growth in 1980s with a better performance than that of the US,
Germany and French in the same period.
Meanwhile, the labor productivity of
manufacturing industry obviously improved, and the enterprise investment also
has increased at a high speed.
Fourthly, although tax reduction caused
decline of the revenue to GDP ratio, it brought the stock market with long-term
prosperity. The policy supported the prosperity of the UK’s stock market in
1980s by the means of reducing enterprise tax burden and stimulating economy
growth. The FTSE-100 index was in a bull market over a long period of time.
During the period of tax reduction, the
rate of interest of the UK’s money market went up and down, which showed no
connection with the stock market tendency. That is to say, it was the reform of
supply front, such as tax reduction, that brought the enterprises with the
performance improvement and thus brought the stock with prosperity.
*This
article is an edited and translated version by CCM. The original article comes
from laohucaijing.com, a website about economic in China.
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