Types
Tax cuts are typically cuts in the tax rate. However, other tax changes that reduce the amount of tax can be seen as tax cuts. These include deductions, credits and exemptions and adjustments. By expanding tax brackets, the government increases the amount of income that is subjected to lower tax rates.Effects
Since a tax cut represents a decrease in the amount of tax a taxpayer is obliged to pay, it results in an increase in disposable income. This greater income can then be used to purchase additional goods and services that otherwise would not have been possible. Tax cuts result in workers being better off financially. With more money to spend, we would expect to see consumer spending to increase. Consumer spending is a large component of aggregate demand. This increase in aggregate demand can lead to an increase in economic growth, other things being equal. Tax cuts on income increase the after-tax rewards or working, saving and investing and thereby they increase work effort, contributing to economic growth. If tax cuts are not financed by immediate spending cuts, there is a chance that they can leading to an increase in the national budget deficit, which can hinder economic growth in the long-term through potential negative effects on investment through increases in interest rates. It also decreases national saving and therefore decreases the national capital stock and income for future generations. For this reason, the structure of the tax cut and the way it is financed is crucial for achieving economic growth.Countries
United States
Notable examples of tax cuts in the United States include: *The Tax Cuts and Jobs Act of 2017 lowered the corporate tax rate to 20%, while also lowering income tax rates, among other changes. *The 2008 American Recovery and Reinvestment Act included a tax credit of $400, lower payroll tax rates, and higher earned income tax credits. * The Economic Growth and Tax Relief Reconciliation Act of 2001 reduced business and investment taxes. *History
Another way to analyze tax cuts is to have a look at their impact. Presidents often propose tax changes, but the Congress passes legislation that may or may not reflect those proposals.John Kennedy
John Kennedy's plan was to lower the top rate from 91% to 65%, however, he was assassinated before implementing the change.Lyndon Johnson
Lyndon Johnson supported Kennedy's ideas and lowered the top income tax rate from 91% to 70%. He reduced the corporate tax rate from 52% to 48%. Federal tax revenue increased from 94 billion dollars in 1961 to 153 billion in 1968.Ronald Reagan
In 1982 Ronald Reagan cut the top income tax rate from 70% to 50%. GDP increased 4.6% in 1983, 7.2% in 1984 and 4.2% in 1985. In 1988, Reagan cut the corporate tax rate from 48% to 34%.George W. Bush
President Bush's tax cuts were implemented to stop the 2001 recession. They reduced the top income tax rate from 39.6% to 35%, reducing the long-term capital gains tax rate from 20% to 15% and the top dividend tax rate from 38.6% to 15%. These tax cuts may have boosted the economy, however, they may have stemmed from other causes. The American economy grew at a rate of 1.7%, 2.9%, 3.8% and 3.5% in the years 2002, 2003, 2004 and 2005, respectively. In 2001, theBarack Obama
Donald Trump
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act, which reduced the corporate tax rate from 35% to 20%. Other changes included income tax rate cuts, doubling of theReasons
Governments may cite several reasons for cutting taxes.Fairness
To begin with, money belongs to the person who possesses it, particularly if they earned it. Reducing the amount of money that is taken by the government can be seen as increasing fairness. However, if tax cuts are financed by cutting government spending, it can be argued that this disproportionately disadvantages low-income earners, as cuts in spending will affect services used mostly by low-income earners, who pay proportionately less tax.Efficiency
Tax cuts can serve to increase efficiency in the market. Cutting taxes can lead to more efficient allocation of resources than would have been the case with higher taxes. Generally, private entities are more efficient with their spending than governments. Tax cuts allow private entities to use their money in a more efficient manner.Incentives
High taxes generally discourage work and investment. When taxes reduce the return from working, it is not surprising that workers are less interested in working. Taxes on income create a wedge between what the employee keeps and what the employer pays. Higher taxes encourage employers to create fewer jobs than they would with lower taxes.Burden
In the US, the overall tax burden in 2020 was equal to 16% of the totalSee also
* Laffer curve * Rahn curve *References