Question

Fernando noticed that the percentage of federal income taxes his employer deducts from his paycheck each week has increased. This means he has less money to spend. However, he has heard that the company he works for just received a large contract from the federal government to build more high-tech helicopters for the military. Olivia is happy that the percentage she pays in federal income taxes has decreased this year. She is thrilled that the candidate who ran on a platform of tax cuts won. She is finally able to purchase a new car and to save money for a down payment on a home. At dinner that night, her friend tells her that his unemployment benefits have just been reduced, will run out soon, and won’t be renewed. What is the relationship between taxes and government spending in these two scenarios?

Answer 1

Answer: When one pays a smaller percentage of a paycheck to taxes, the government takes in less money initially, but most likely takes in more money overall in the long run.  When unemployment checks are reduced in amount, the government spends less money.

Explanation: With reduced tax deducted from a paycheck, the wage earner has more money to spend, which stimulates the economy. More jobs become available, there is less incentive to live off of unemployment dollar amounts, and fewer people are unemployed. With more people working, there are more paychecks, which increases the overall tax paid to the government. The government, the economy and the taxpayers all benefit.