The National Income Formula, also known as the NIF, is a complex mathematical model that was created by a team of economists who are members of both the U.S. government and the private sector. This model attempts to show what different changes would occur if every element was removed from the current U.S. economy.
One of the main elements that is missing from this model is new state revenue. Because new state revenue does not have to be added in, it has been assumed that any revenue growth would come from taxes paid to other jurisdictions. However, this assumption has proven faulty when new revenues are obtained for other reasons. For instance, tax breaks for businesses have been shown to grow faster than general revenue growth.
In addition to missing new revenue, this model also fails to include economic growth that is created from new ideas. Many of these ideas are not always feasible and not all of them create jobs. Economists assume that the NIF will eventually show that revenue is required, but this model is not showing us how much revenue will be required, only what is being assumed will happen.
Other assumptions about economic growth are also not accurate. One such assumption is that all economic growth is the result of productivity increases and job creation. This assumption is actually false because productivity improvements do not automatically create more jobs.
Another assumption is that all economic growth is based on consumer spending growth. In fact, there are some types of spending that are not affected by economic conditions. The NIF does not take into consideration the type of spending that is done by businesses or individuals.
Another assumption made by economists is that the only type of economic growth that occurs is growth in wealth. As previously stated, this model shows that this growth is not necessarily the result of wealth creation, so it is not true that the only economic growth is due to increased wealth.
The National Income Formula also does not account for the effects of tax cuts on economic growth. As previously stated, some tax cuts have been shown to cause greater wealth creation than others. Economic models cannot determine which ones cause greater wealth creation, so tax cuts can cause economic growth to be slower than it otherwise would be.
A better approach to using the National Income Formula in determining how tax cuts affect economic growth is to look at the effects of cutting taxes on the amount of wealth available to investors and then taking the difference between the growth rate of capital and savings and adding it to the national income. This means that any tax cuts that result in greater wealth creation can be attributed to the reduction in taxes on the investment returns.
When we apply this approach to economic growth, we find that many tax cuts result in a slower growth rate and less overall wealth creation than they otherwise would. Some of these cuts have been found to result in the slowing down of economic growth. This implies that tax cuts could slow economic growth even more if the government did not cut taxes in order to stimulate growth.
For instance, some of the tax cuts that have been found to result in economic growth are cuts in the estate tax and capital gains tax. Both of these have been found to be ineffective in slowing economic growth. Because the tax rate for these types of investments is lower than the tax rate on earnings and profits, they were not expected to slow the growth process as much as they have in some cases.
In addition, another assumption in the National Income Formula is that all of the growth in economic wealth that occurs is the result of savings and not a result of the increase in production. Economic growth is often seen as occurring as a result of increased production. However, when workers are paid less than they used to be paid, they are more likely to save their money rather than spend it. This has been shown to create less wealth than they would without this change.
Some other assumptions that are found in this formula have not shown the results that would warrant their inclusion in the model. One example is the assumption that business inventories are fixed. This assumption is not true and the NIF does not account for changes in inventory.