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A tax cut is a reduction in the rate of tax charged by a government, for example on personal or corporate income. Whether a given tax cut will increase or decrease total tax revenues is much discussed by both economists and politicians.
Economic theory The immediate effects of a tax cut are, generally, a decrease in the real income of the government and an increase in the real income of those whose tax rate has been lowered. In the longer term, however, the effect on government income may be reversed, depending on the response that tax-payers make. Supply-siders argue that tax cuts for corporations and wealthy individuals provide them with an incentive for investments which stimulate so much economic activity that even at the lower rate more net tax revenue will be collected. The longer term macroeconomic effects of a tax cut are not predictable in general, because they depend on how the taxpayers use their additional income and how the government adjusts to its reduced income. Four idealised scenarios can be hypothesised: In practice it is likely that a mixture of these effects will occur, and the net effect of any tax cut will depend on the balance between them. It will therefore be a function of the overall state of the national economy. In conditions where most goods and services (especially those frequently purchased out of discretionary income, such as consumer durables) are produced domestically, a tax cut is more likely to provide a macroeconomic stimulus than in conditions where most consumer durables are imported. Furthermore, the actual effect will inevitably be difficult to discern, because ofnumerous other changes in the economy between the time when a tax cut is proposed and the time when its full effects would be realized. If government does reduce its expenditure to accommodate tax cuts, there must necessarily be reductions in government services, and there may also be a reduction of the government's capacity to redistribute income to reduce income inequalities. Critics of tax cuts argue that this leads to a fall in overall economic welfare because the effects fall disproportionately on those with the lowest incomes. Tax cuts in the United States In the United States in recent decades, most "supply-siders" have been Republicans (though the largest individual tax cut was initially proposed by President Kennedy), and President Ronald Reagan signed tax cuts into law, in the belief that cutting the tax rate would stimulate investment and spending, with overall beneficial effects -- including increased tax revenues. While it took some time, these tax cuts arguably stiumalted a double in total tax revenues, from five hundred billion to one trillion doallars. In fact, there are some who credit the Reagan tax cuts with the eventual surpluses of the 1990s * Democratic Governor Bill Richardson in recent years has supported tax cuts to spur job growth. The most recent tax cut derived from President George W. Bush. Critics of this tax cut argue that it has produced a wide disparity between the rich and the poor, but others say that this gap has occured more because 1) there are so many poor immigrants still coming in to this country with no professional skills and little education and 2) the importance of a college education is growing dramatically, and those without it can't compete in a global economy. These others would say that the Bush tax cuts helped the poor the most, as the largest income tax rate drops were given to the those with the lowest incomes. Tax cuts in Canada The 2006 Federal Budget announced the decrease of the GST from 7% to 6%, and subsequently to 5% over the next five years. Capital gains tax Much discussion has occurred regarding the optimum capital gains tax rate, with some advocates calling for tax cuts in the belief that a lower rate (e.g., under 25%) will provide an incentive to investors to sell old stocks and invest in new stocks -- which supply siders maintain encourages the creation of new jobs, reduces unemployment, and has the paradoxical effect of increasing tax revenues more or less immediately, an idea first proposed by economist Arthur Laffer while an advisor to Ronald Reagan (See Laffer curve). In addition, a recent report issued by the Cato Institute argues that the burden of capital gains tax is felt by the poor much more than the rich. The report quotes a painting contractor as saying: "You're looking at a poor man who thinks the capital gains tax cut is the best thing that could happen to this country, because that's when the work will come back. People say capital gains are for the rich, but I've never been hired by a poor man." While this paradoxical effect is clearly possible in principle, opponents of capital gains tax cuts are not persuaded that it occurs in practice. They therefore argue that the rate of capital gains tax should be raised, since it is paid primarily by the better off, who can afford to contribute disproportionately to government revenues | ||||||||
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