Bush Tax Cut Case Study

Barack Obama and the Bush Tax Cuts
From 2007, the global financial crisis caused the global economy in turmoil. Because the crisis originally from the defaults of the U.S. subprimes mortgage market, the financial institutions are experiencing a dramatically hard time, especially five major U.S. investment banks. In the Unite States, the stock market decrease about 40% off, and the real estate prices also fell sharply, so the wealth of household had fallen. Because of this situation, household take out their home equity loans to fund spending. However, bankruptcies and home foreclosures were climbing (Weinziel & Werker, 2009). For save the wealth, household need to reduce consumption; facing to the depression of stock market, businesses need to cut back on investment. Furthermore, in the short-term, the aggregate demand will
The multiplier was the factor by which economists multiplied a tax cut to eliminate its eventual impact on GDP (Weinziel & Werker, 2009). Economists prefer use multiplier calculation to measure the impact of fiscal policy and the size of a stimulus package. However, if fiscal policy cut the taxes by government, people have more income to spending. First, we need to focus on the “output gap”---the different between the current GDP and potential GDP, and the gap could be calculated by multiplier. When we calculate the output gap, the size of tax rebate or the spending increase needs to close the gap. Second, we also can focus on the desire reduction in the unemployment rate rather than output gap. When the economy of U.S. rises again, the GDP will be increase, and the unemployment rate was decrease. Consequently, every economic issue is in the business cycle. A fiscal policy, such as tax cut should follow the business cycle. That is why many fiscal policies are inefficient because policy maker don’t follow the business cycle and only think about high benefit of a