Final answer:
Eliminating tax deductions for private companies is likely to cause a decrease in consumption and investment, shifting aggregate demand to the left. This could lead to reduced real GDP and increased unemployment. Government spending on social safety programs might rise due to the economic contraction.
Step-by-step explanation:
If the US Congress decides to eliminate the sections of deduction in the IRS filing specifically for every private company, we can expect it to have several economic impacts. According to the aggregate supply and demand framework, the elimination of these tax deductions would likely lead to a decrease in after-tax corporate profits. This decrease could reduce consumption and investment by private companies, shifting the aggregate demand (AD) curve to the left. Consequently, there may be a decrease in real GDP and an increase in unemployment, as businesses have less incentive to spend and invest, leading to lower economic output.
During a recession, tax cuts are often used to increase consumption and shift the AD curve to the right, leading to a rise in real GDP and a fall in unemployment without causing significant inflation, as long as the economy is not already at full employment. Conversely, decreasing tax deductions, which is effectively a tax increase on corporations, could reduce aggregate demand, hindering economic recovery and potentially deepening the recession.
Furthermore, with lower aggregate demand, there is less need for government spending on unemployment benefits, welfare, Medicaid, and other social safety net programs because of the automatic stabilizers that lower government spending as the economy contracts and vice versa. However, in the scenario where deductions are removed, government social spending might increase due to rising unemployment.