The Pros of Introducing an EITC for Australia
With reference to classical economic theory, the economy of a country moves towards the equilibrium at full capacity and full employment (De Grauwe, 2015, p. 101). Also, the aggregate demand will make an adjustment to the full potential GDP with the assistance of the people’s wages and the prices. Therefore, the availability of Earned Income Tax Credit being available to citizens with low income, it will make them have high-income availability thus there will be an improvement in their incomes. This will make the economy of the country to move towards the equilibrium because now people have money. Again the expectant mothers that have access to Earned Income Tax Credit will receive better prenatal care, and the likelihood of them giving birth to premature to low weight infants will lower. In this case, EITC will be of advantage to the Australian citizens.
There is a component of Keynesian theory that states that, according to this theory, the expenses on consumption are mainly influenced by the income level and therefore, provision of Earned Income Tax Credit to the low-income earners in Australia will increase the income level of the low-income earners in Australian, and this will lead to increased consumption. Though there will be an increase in consumption as income increases, they won’t be at the same rate with increase in income. The income and the rate of consumption relate, and this relationship is referred to as consumption function. EITC will be of great importance to the Australian citizens receiving it because EITC provision is proved to provide insurance that is temporary prevents the citizens from entering into poverty (Dickovick, and Eastwood, 2016). Therefore, this is advantageous to the people of Australia.
Another component of Keynesian theory is an investment. According to this components, increased income results to increase expenditure on assets for instance machinery, inventory of raw materials, the final goods, and other utilities. Therefore, the introduction of Earned Income Tax Credit in Australia as well is advantageous because it will expand the economic security as the people receiving this money will use it in investments, payment of their medical expenses, rent, and other utilities like transport (Evans and Garthwaite, 2014, p.258). The same refunds in tax will help the workers in the building of their savings and making investments to build their financial stability.
According to the supply and demand theory which states that, during the time of increased supply, the prices of products tend to drop and when the demand for products increases, the prices of the same products rises high, the demand for products in an economy comes as a result of increased income to the people. Therefore, the introduction of the Earned Income Tax Credit to people in Australia will increase their income level hence the demand for goods and services will increase. Availability of extra money will lead to increased investments as well. This will improve the living standards of people in Australia and as a result will lead to an increase in economic growth in Australia (Rogerson, 2017).
The Cons of Introducing an EITC for Australia
According to the theory of supply and demand, demand for product increase when the prices of the products are low, and the supply of the products increases when prices are high. Introduction of Earned Income Tax Credit for Australian low-income earners will make them have extra income for spending. This as well will increase the demand for goods and services in the country. Increased demand caused prices of commodities to increase, and this causes inflation in the country. So this would be one of the side effects of the introduction of Earned Income Tax Credit in Australia (Sykes, Križ, Edin, and Halpern-Meekin, 2015, p.243). The value of the Australian currency will lose value too because of the inflation.
According to Laissez theory, he restricts the government from intervening in the economic activities. This is because when the government only concentrates on the protection of the peoples, the economy becomes stronger. In this case, we see the government intervening in the economy by choosing to offer Earned Income Tax Credits to low-paid employees. We get to see that due to increased income to the employees from the government, chances of inflation on the product are high. Now let’s consider a situation where the government withdraws from making such payment after a certain period of time (Chaudry, Wimer, Macartney, Frohlich, et al. 2016). The employees used to receiving such EITC will face a hard time because the cost of living will be high due to increased prices of products. Here we find that EITC provides short-term safety. This is seen as disadvantageous to the citizens receiving this money in future and the nation at large.
According to the theory of Laissez of government restriction from intervening the operation of the economy, we get to see that the act of the government of offering EITC to low-income earners will make them fail to work hard in order to achieve their income requirements and this is just helping them to be lazy (Dahl, and Lochner, 2017, p.629). Failure to work hard will slow down the economic growth, and this is disadvantageous to the country. Also, the payment of these money increases the government expenditure. Instead, this money should be used for funding other projects that will benefit all citizens equally. For instance for the construction of infrastructure that will be us beneficial to all.
The introduction of the Earn Income Tax Credit in Australia might have affected the minimum wage that has been set by the government (Tomlinson, 2016). The minimum wage refers to the amount of wage that a person working in a firm is entitled to receive after working for a certain period of time either in terms of hours or days. The introduction of this EITC in the country may make the firms pay their worker little money because they know the government will give them EITC to top up their salaries (Hoynes, Miller, and Simon, 2015, p.172). Also, you get to find that a firm that had the intentions of increasing the salaries of its employees when they realize that the government s offering EITC to low paid employees, they might fail to increase the employee salaries so that they can be paid by the government. This act will be against the minimum wage policies that have been put forward by the government.
In conclusion, the Earned Income Tax Credit has become the counter piece of many developed countries in the world. This can be seen when this money is used for helping those with less income in order for them to acquire the basic commodities and also to reduce poverty in the country. Comparing the two sides, i.e. the pros and the cons, there is clear indication that the program has more positive effects compared to the negative effects (Liang, Varma, Brown, and Park, 2018). The program helps the low-income earners with important impacts like health support for both children and adults and more beneficial things that come when one receives this money.
References
Chaudry, A., Wimer, C., Macartney, S., Frohlich, L., Campbell, C., Swenson, K., Oellerich, D. and Hauan, S., 2016. Poverty in the United States: 50-year trends and safety net impacts. Washington, DC: US Department of Health and Human Services.
Dahl, G.B. and Lochner, L., 2017. The Impact of Family Income on Child Achievement: Evidence from the Earned Income Tax Credit: Reply. American Economic Review, 107(2), pp.629-31.
De Grauwe, P., 2015. Economic theories that influenced the judges of Karlsruhe. In Managing Risks in the European Periphery Debt Crisis (pp. 101-107). Palgrave Macmillan, London.
Dickovick, J.T., and Eastwood, J., 2016. Comparative Politics: Integrating Theories, Methods, and Cases. Oxford University Press.
Evans, W.N. and Garthwaite, C.L., 2014. Giving mom a break: The impact of higher EITC payments on maternal health. American Economic Journal: Economic Policy, 6(2), pp.258-90.
Hoynes, H., Miller, D., and Simon, D., 2015. Income, the earned income tax credit, and infant health. American Economic Journal: Economic Policy, 7(1), pp.172-211.
Liang, H., Varma, K., Brown, J., and Park, J., 2018. Learn More & Achieve More-An Innovative Teaching Method Applying Economic Theories to Secondary Science Education.
Rogerson, W.P., 2017. ECONOMIC THEORIES OF HARM RAISED BY THE PROPOSED COMCAST/TWC TRANSACTION August 22, 2017.
Sykes, J., Križ, K., Edin, K., and Halpern-Meekin, S., 2015. Dignity and dreams: What the Earned Income Tax Credit (EITC) means to low-income families. American Sociological Review, 80(2), pp.243-267.
Tomlinson, J., 2016. Australian Basic Income: Efficiency and Equity. In Basic Income in Australia and New Zealand (pp. 53-68). Palgrave Macmillan, New York.
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