Tax Policies Applied Towards The Crisis

Because of economic contracting in the US, several governments began to adopt steps. Some governments tried to implement monetary policy while others took fiscal policy actions.

In addition to the actions taken by central banks, governments, particularly in industrialized countries, have enacted complete financial packages that include tax cuts and increased government spending.

America, on the other hand, first attempted to resolve the crisis by cutting interest rates, lowering the banking sector's borrowing costs, and relieving the issues related to housing loans. When these policies failed to provide the intended effects, other packages containing financial policies were created. Financial measures such as tax cuts, increased social spending, and infrastructure project initiatives were included in the packages. With these packages, the US realized it couldn't control the crisis alone through monetary policy and instead turned to fiscal policy.

America used several fiscal measures in the past when it struggled through recessions. Increases in personal income were observed as a result of the tax reductions enacted with the “Economic Growth and Tax Reduction Reconciliation Law” issued in 2001. The money generated through these discounts was intended to be reflected in expenditures.

Although, Tax cuts raised personal income by 1.9 percent while personal expenditures grew by just 0.2 percent, based on the research.

The United States of America had to implement fresh tax measures to deal with the issue about 7-8 years following these reforms. To begin with, it applied to a variety of SCT rates and income tax reductions, as well as an increase in current discount amounts. The tax cuts enacted in this manner were designed to boost a person's disposable income by lowering direct tax rates, which was followed by lowering indirect tax rates and providing tax incentives to investors. The initiatives were designed to enhance these groups' net disposable income after taxes, with the expectation that these funds would be used for private spending.

The IMF stressed the need for fiscal measures as a means of overcoming the crisis. Because the financial crisis has hampered money transmission channels, many nations have already exhausted their monetary expansion options, and central banks' space for interest rate reduction has shrunk significantly. Fiscal policies are the only policies that can be implemented at this time. Because market compression is one of the most major causes of economic crises, increasing consumer

46 wealth is the best method to expand consumer markets. With such measures, it is feasible to enhance consumer earnings, increase the minimum wage, reduce taxes on salaries and low income, and so on.

The US government planned a 342 billion $ tax relief package for businesses and individuals in response to the economic recession. Tax savings of $500 for single individuals and $1,000 for married workers for those who had a yearly income of less than $200,000 were included in this package. Individuals with an annual gross income of less than $75,000 and married couples with an annual gross income of less than $150,000 are eligible for the tax discount. Individuals received a 10% tax deduction for the first $6,000 of their income, while married couples received a 10%

deduction for the first $12,000 of their income. A tax deduction of $300 per kid, on the other hand, was applied to married couples who qualified for the deduction.

Different deductions in corporation tax were established and the deduction amounts were raised, various exclusions and exemptions were added, and future loss deduction periods were extended.

Furthermore, the transfer period for prior year losses was extended from two to five years, and tax incentives for investments in internet infrastructure and renewable energy resources in rural regions had been created. The primary goal was to create new investment possibilities and reduce unemployment, and for that reason, 50 percent of the equipment purchased during the year was eligible for a tax break.

• The following programs are included in the tax packages available to individuals and companies:

• The tax taken from unemployment benefits for the first $2400 has been temporarily eliminated.

• For families with at least three children, including for educational expenses, tax benefits have been provided.

• Housing receivables are eligible for a tax credit of $7500 from January 1 to July 31, 2009.

• Until 2009, 50% of the earnings from the sale of small enterprise shares held for more than 5 years was tax-free, but this rate was raised to 75%.

Tax policies were given priority in the battle against the crisis after the election, and several priority objectives were defined. New tax exemptions for people who had low- and middle-income, government contributions to the pension funds of married couples who had an annual salary of less than $75,000, $3,000 in tax benefits for each company that hired new workers in the 2009-2010 period, and the total elimination of unemployment insurance taxes are among these goals.

The United States was not the only country to adopt a post-crisis tax policy. For financial help to consumers, Canada and France had implemented direct income tax reductions, while Brazil, India, and Turkey had performed sales tax reductions for some items such as automobiles, energy, groceries, etc.

47 Aside from all these tax policies, additional comprehensive actions are necessary to stabilize financial markets and encourage global economic development. In order to accomplish these goals:

• Efforts to take the necessary steps to stabilize the financial markets should be sustained.

• Household consumption should be boosted through fiscal policies, and monetary policy aid should not be overlooked.

In fact, the government's support for large companies by stepping forward, ensuring the progression of financial transactions by issuing money to the market without disruptions, and avoiding unnecessary acceleration of money flows between countries by putting financial transactions under relative control are all intended to keep the financial crisis at bay and preventing its expansion.

When looking at the tax policies that were considered during the crisis, measures targeted at reducing market stagnation were adopted. To extend the declining trade volume, raise overall demand, and assure economic development, expansionary tax measures have been introduced.

Table 6. An Overview of the US Mortgage Crisis

Type of Crisis Causes Effects Tax policies

Real Sector Crisis / Recession Crisis

Unstable banking sector

Disruption of the structure of mortgage loans

Swelling in house prices

Problems in the credit rating process

International trade volume shrank Decreasing Growth rates

Declining Aggregate demand

Unemployment increased Confidence in markets decreased

Expansionary tax policy applied Consumption tax rates have been reduced

Exemptions and exceptions have been expanded

Increased tax incentives Special tax

deductions were made for low-income groups

Even though the financial policies and packages put in place by the US government did not entirely stabilize the financial services sector but kept the markets from crashing.