Final answer:
Katie's decision to liquidate investments in anticipation of the Medicare tax exemplifies discretionary fiscal policy aimed at tax planning. Such planning aims to achieve tax efficiency and is influenced by potential changes to tax policies.
Step-by-step explanation:
In anticipation of a new 3.8% Medicare tax on investment income, Katie has decided to liquidate several of her investments before the effective date. This strategy may be an example of tax planning using discretionary fiscal policy. Tax planning involves analyzing financial situations from a tax perspective, with the aim to ensure tax efficiency. Through tax planning, all elements of the financial plan work together in the most tax-efficient manner possible.
Katie's decision is influenced by her understanding of the upcoming tax changes and is timed to avoid the additional taxes, which is a common strategy among investors. 401(k)s, which offer special tax-deferred status on savings for old age, are an example of how tax policies can influence investment decisions and retirement planning. Likewise, historical tax policies, such as those during the Kennedy and Reagan administrations, also demonstrate how tax systems can affect overall economic and investment landscapes.