Answer to Question #65413 in Macroeconomics for walter

Question

what adverse effects might be caused by tax incentives to increase saving?

Answer 1

The history of top economies shows that fiscal instruments like taxes and government expenditures should be used not very often, as they can cause long run effects on economy.

Especially it is about taxes. The households and business are very sensitive to any changes in tax rate. Changes in tax rate first of all have an effect on disposable income. One should be aware that disposable income is equal to income minus taxes. This means that if taxes increase the disposable income will decline. The cut of incomes will led to the cut of consumption, which is one of the major parts of GDP. In its turn the slow levels of consumption will bring slow level of economic growth.

On the other hand we will get economic growth decline in long run time space as a result of cutting of savings, as you know with short of money we will not have any chance to keep money.

The other part of the economy is business, which considers the dynamic growing engine of economy. Any tax increase will cause closing of much small entrepreneurship, as they will face the further profit declining. This will bring the loss of job places, which will again cut the development of country for many years ahead.