GROUP

ASSIGNMENT

Course: FIN202
BA1301 FIN201

GROUP MEMBERS:

Trương Quang Tân

Ngô Quốc Hưng
Đậu Anh Phượng
Lê Đình Trâm
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BA1301 FIN201

Introduction

Analysis
If the government is spending more than it receives in tax revenues, then it is
running a deficit. In other words, this can be the result of a tax cut and an increase
in government purchases. ( Government budget = Taxes – Government purchases =
T - G)
❖ A cut in taxes

In this case, with government purchases G constant and output Y unchanged at

its full-employment level, the tax cut will reduce desired national saving (S = Y
+ NFP – C – G) only if it causes desired consumption C to increase.
Actually, from producers’ perspective, the income tax reduction will facilitate
small and medium enterprises in developing production and improving the
competitiveness. In the context of international integration where Vietnam is
participating in many free trade agreements and opening the market, small and
medium enterprises play an important role in socio-economic development.
There currently are more than 600,000 businesses, of which the private sector
accounts for nearly 500,000 businesses and among these 96% are small and super
small businesses, 2% are medium-sized enterprises and 2% are large enterprises.
Additionally, the private sector has created about 1.2 million jobs, contributing
more than 40% of GDP each year. As a result, a tax cut will raise production and
reduce the product price, which leads to significantly increase in consumption.
From consumers’ perspective, practically, when people’ income after tax, or
disposable income is higher because of a tax cut, they will have a tendency to
consume more. Thus, desired national saving will decline.
On the contrary, a tax cut has a strongly negative impact on government budget.
According to the Ricardian equivalence proposition, a tax cut today force the
government do something to compensate for the deficit by reducing today’s
government purchases or simply pay for its current fixed purchases by borrowing
from different sources inside the country and in the world. In this case,
government purchases is unchanged, so today borrowed money will be paid with
interest in the future, which increases future taxes and lowers the future
disposable income. Therefore, a tax cut has no influence on consumers for long-
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term periods, so they will not increase their current consumption. Consequently,
a tax cut does not influence desires national saving.

❖ An increase in government purchases

With output Y unchanged, an increase in government purchases G directly

reduces desired national saving ( S = Y + NFP – C – G). Although government
purchases may raise future taxes which reduce consumers’ expected future
income and their desired consumption, it is just a slight fall in consumption,
compared to increase in temporary government purchases.
When the increase in the budget deficit reduces desired national saving, it means:
S = Y – C – G + NFP
= I + (NX + NFP)
= I + CA decreases
With no change in the effective tax on capital, investment has no change, so decrease
in desired national saving will reduce the current account CA surplus; in other words,
it raises the current account CA deficit.

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Conclusion
In conclusion, ơi

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