Tax cut is the reduction of tax charged by the government. This may be on individual or on corporate basis. The effects of tax cuts are increases in income to individuals and companies and a decrease in government income. The tax cut influence depends on the tax payers’ actions after it has been cut down and how the government controls less income. It produces more tax revenue to the government and capital gain. In this light, this paper focuses on how tax cuts can be useful in economy revival and the general need for tax reduction.
According to Kogan (2003), tax cut can be good or bad depending on what a company, an individual or the government wants to accomplish. If the middle class and lower class citizens are given tax cuts, they are able to survive and put more income in their pockets. These people will be able to buy items like computers, washing machines and cars which they could not afford.
Tax Cuts and Economy Revival
When the government cuts its expenditure, the tax payers increase theirs, and this improves economic welfare since people will buy their commodities at a lower price. When they spend money on commodities from their country, it brings about a stimulus to the economy which leads to economic growth.
If the government decreases spending to maintain tax cuts, there must be a decline in government services and this results to disparities in income which the government is unable to control. Therefore, the government must rely on appropriate tax multiplier to analyze the aggregate production resulting from tax reduction (Maunder et al., 2000).
As a result, job creation is a major advantage of tax cuts because as many corporations invest more, they will create more job opportunities. Lower taxes will encourage people to enter the labor force and work for longer hours. This is also called expansionary fiscal policy (Maurice & Thomas, 2008) because the government earns more revenue because if taxes are high people will not work, and will not pay taxes, and if they work the government gains more revenue and many companies will invest in the country.
This improves the aggregate demand because inventory levels are equal in all sectors. Furthermore, it will stimulate the economy although it will take time before the impact is felt. In the United States, there has been largest low cut of health care tax which is affordable for everyone.
However, tax cuts present some challenges to the government and citizens. First, the wealthiest in the economy is given a wide tax cut and it creates a big gap between the haves and the have not. Besides, when there is little impact on economy, sometimes tax cut does not influence investment decisions. There is increase in budget deficit where the budget exceeds income.
For instance, tax cut on cigarettes can encourage large consumption which may be dangerous health wise. Lower costs lead to higher costs elsewhere. For example, America has lower taxes but pay for private insurance. Sometimes, when there is a tax cut, people do not work more as they do not spend much. Cut spending also annoys some people because investors expect people to spend more (Welch & Bello, 2007).
Likewise, in fiscal policy theory, there is free trade, and free movement of capital, which allows expansion to the economy. Increased demand causes the currency to go up. Once the currency goes up, goods coming from that country cost more in other countries than the normal price, and foreign goods coming into the country cost less than before, thus bringing export increase and decrease in imports. This forces the government to apply discretionary fiscal policy on certain commodities to balance imports and exports, thus stimulating aggregate demand (Maurice & Thomas, 2008)
When tax is cut and barriers are lowered, there is a flow of supply of goods and services. This is accomplished when income tax and capital gains rate are adjusted and reducing regulation which allows flexibility.
In United States, one of top priorities in congress has been reducing the burden of finances to those who are in middle class and lower class especially in these tough times, hence tax cut is both beneficial to the individuals, small investors, corporations and to the government, rebuilding the Americas competitive advantage rather than economy strategy centered on Wall Street.
Maunder, P., Myers, D., Wall, N., & Miller, R. (2000). Economics Explained. London: HarperCollins Publishers.
Maurice, S. & Thomas, C. (2008). Managerial Economics. (9th Ed.). New York: McGraw-Hill.
Richard, K. (2003). Will tax Cuts Ultimately Pay for Themselves?. Centre on Budget and Policy Priorities. Web.
Welch, W. & Bello, M. (2007). Dems Call for Ending Tax Cuts for Rich. USA Today. Web.