Tax cuts boost the economy

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?

Tax cuts make people work harder

There are some who think this is incorrect.

Let's think about this.

Taxes cut, I keep more of my money earned. I am therefore more motivated UNLESS a) I have reached my target income and trade off work for leisure and also b) I am ABLE to cut down on my hours. (How many jobs let you do this?)

So either a) I will look for more work, more overtime (as the rewards have risen) or there will be no reaction other than short-term benefit.

Theerfore out of ten people, 7 may have no effect or only short-term, three will work more overtime.

Then there's the self-employed. They work hard anyway but cut their tax and the rewards are greater and so they may work even harder. Maybe they have more control over their work-life balance, maybe less.

If tax cuts don't make people work harder then why do companies offer higher wages to attract new workers? Why offer productivity bonuses?