True or False or Uncertain? Explain. Is the following logical? Advocates of the

Question

True or False or Uncertain? Explain.

Is the following logical? Advocates of the Tax Reform Plan 2017 have stated that, “A corporate tax cut would dramatically increase capital stock by 15% and reduce the trade deficit.” The corporate profit tax cuts and incentives for investment will encourage both domestic firms to invest more and thus increase the capital stock in the U.S. They argue foreign capital will flow into the U.S. in hundreds of billions of dollars from global financial markets. Their analysis explicitly states they ignore macroeconomic impacts of budget deficits.

Explanation / Answer

“A corporate tax cut would dramatically increase capital stock by 15% and reduce the trade deficit.”

It is uncertain

Explaination :

1) According to the proponents of tax cut, it is true that the capital stock increases as investments will grow in USA and the global investors will bring the capital into usa.  

But whether it reeduce the trade deficit is not certain because , in order to bridge the trade deficit, the country has to produce the goods and services which are being imported from outside say china. However considering the low cost of prodution in other parts of world, the investments may not be able to made in sectors causing trade deficit.

In short run it will reduce the Balance of payments in comparison with the GDP.

2) Their Analysis explicitly ingnore the macro economic impacts. This means the low tax collection will lead to fiscal deficits and burden on the individuals and Governments. The credit rating of the nation will be reduced. The capapcity to pay the debts will be impacted negatively. This will spiral down into crisis making the nation not favourable for the investments in long run.

However if Government gives tax incentives in selective sectors, there is a possibility of reducing trade deficit and increase in capital stocks. however it needs to consider macro economic considerations and the global economic trends.

So it is uncertain, whether tax incentives will increase capital stocks and reduce trade deficit.

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