The current session of Congress has proposed a tax relief for the American people. The Keynesian idea that government should increase spending to stimulate the economy had been discarded since the failed stimulus package proposal of 1993.
Median household income has declined by 6.6 percent beginning when Ronald Reagan left office and ending in 1995. The 1990 tax increase under George Bush and the major increase of 1993 during the presidency of Bill Clinton have resulted in a drag on the economy. The success of the economy has mainly been due to increased productivity in the computer industry and the demographics of people having more money to buy goods and services as they get older.
The question of what impact this will have on the nation's GDP can be answered by looking at each of its four contributing factors: (C + I + G + NX).
1) Personal spending, or consumption, will increase. A large portion of personal income is spent on cars and durable goods, which leads to more manufacturing jobs. After the Reagan tax cut in 1982, personal expenditures rose by 4 percent in 1983, 7 percent in 1984, and 3.6 percent in 1985. After 1985, personal expenditures would rise no higher than 3.4 percent until 1996.
2) Personal investment will increase. This particular tax bill contains relief for all incomes; contrary to what some politicians are saying, it is not intended to give more benefits to higher income groups. It will reap greater benefits, however, for those who invest their savings and take entrepreneurial risks.
3) Government spending will have to be kept in check or else budget deficits will reoccur. Hardware and necessary spending will continue as usual; inefficient programs and unnecessary welfare will be curtailed. .
4) Net exports should rise as US productivity and manufacturing activity increases. Prices will be lower and goods will be of better quality due to competition.
The US GDP doubled from 2,784 trillion in 1980 to 5,438 trillion in 1989.
