There are some who think this is incorrect.
Let's think about this though. The Laffer curve (see left) shows us that if you cut taxes this MIGHT lead to an increase in tax revenue - but it might not, especially if taxes are cut to zero!
But in some cases tax cuts will boost the economy.
Cut taxes....disposable income rises...spending increases...some of it on domestic goods. Indirect tax revenue rises. Employment rises owing to the increase in demand. More taxes received.
Maybe total tax revenue has fallen....but also maybe with lower taxes people work harder. Supply-side: people unemployed look for work.
Administration costs for unemployed, fall.
Benefits given out fall. Thus government spending falls so less need to borrow.
So tax cuts DO boost the economy because:
a. tax revenue may rise
b. unemployment costs fall
c. confidence and motivation improve. Productivity rises.
That's correct....isn't it?
It is incorrect because if tax rates are too low and so even if all people will pay taxes, revenue from taxation will be still low. And so revenue from taxation might increase if tax rates are not too low and not too high and this rate will lead to an increase in consumption.
ReplyDeleteTax cuts don't always boost an economy, because as tax revenue will fall, thereby there might be a budget deficit
This all depends on the degree of the tax cuts, the level of unemployment and current tax rates. If at current tax rates, unemployment is low and sustainable growth rate high, then the tax cut might have little effect. However, if the reverse is the case, then the tax cut will have a positive effect on the economy.
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