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Encyclopedia > Tax cut

A tax cut is a reduction in the rate of tax imposed by a government. Whether a given tax cut will increase or decrease total tax revenues is often discussed and debated by both economists and politicians. A tax (also known as a dutyor Zakat in islamic economics) is a charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (e. ... “Taxes” redirects here. ... Look up revenue in Wiktionary, the free dictionary. ...

Contents

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. Depending on the original tax rate, tax cuts may provide individuals and corporations with an incentive for investments which stimulate so much economic activity that even at the lower rate more net tax revenue will be collected.[citation needed]


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. Three idealised scenarios can be hypothesised: Macroeconomics is the study of the entire economy in terms of the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the general behavior of prices. ...

  1. Government cuts its expenditure, and taxpayers increase theirs, spending the money on commodities sourced from within the country. This combination is macroeconomically neutral, but advocates of a free-market economy argue that it improves economic welfare, since people are more accurate than the government in spending money on commodities that they actually want.
  2. Government maintains its expenditure (thus incurring debt), and taxpayers increase theirs, spending the money on commodities sourced from within the country. This combination provides a stimulus to the economy, and it is on these grounds that advocates of supply-side economics frequently argue for tax cuts. It should lead to economic growth, bringing about greater general prosperity, though unless managed carefully it will also lead to inflation. A government making tax cuts and incurring debt usually hopes that the economic stimulus of the tax cut will be large enough to produce a long-term increase in tax revenues, allowing the debt to be paid off in the future. If that does not occur then the government can be left with a severe budgetary crisis.
  3. Government maintains its expenditure (thus incurring debt), and taxpayers either save their increased income or spend it on commodities sourced from outside the country. This combination is not inherently deflationary, but it contributes to balance of payments difficulties which may have secondary deflationary effects and as noted above may lead to a government budgetary crisis with a painful readjustment to follow.

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 of numerous other changes in the economy between the time when a tax cut is proposed and the time when its full effects would be realized. A free market is a market where the prices of goods and services is arranged completely by the mutual non-coerced consent of sellers and buyers, determined generally by the supply and demand law with no government interference in the regulation of costs, supply and demand. ... Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively managed using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates. ... The balance of payments is a measure of the payments that flow from one exports and imports of goods, services, and financial capital, as well financial transfers. ...


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 recent decades, most "supply-siders" in the United States have been Republicans (though the largest individual tax cut was initially proposed by President Kennedy from the Democratic Party) with the belief that cutting the tax rate would stimulate investment and spending, with overall beneficial effects (including replenishment of some lost tax revenues[1]). President Ronald Reagan signed tax cuts into law and while it took some time, these tax cuts arguably stimulated a doubling in total tax revenues (from five hundred billion to one trillion dollars).[2] Don Lambro of the Washington Times credits the Reagan tax cuts with the eventual surpluses of the 1990s.[3] The Center on Budget and Policy Priorities and President’s Council of Economic Advisers argues that tax cuts do not pay for themselves stating that the "large reductions in income tax rates in 1981 were followed by abnormally slow growth in income tax receipts".[4] The most recent federal tax cut of significance were derived from President George W. Bush.[1] The Heritage Foundation has stated that the Bush tax cuts have led to the rich shouldering more of the income tax burden and the poor shouldering less;[5] however, Bush is often highly criticised for giving tax cuts to the rich.[6] Bush has claimed that the tax cuts have paid for themeselves but critics argue that this is false.[7] At the state level, Democratic Governor Bill Richardson in recent years has supported tax cuts to spur economic growth.[8] Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively managed using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates. ... The Republican Party, often called the GOP (for Grand Old Party, although one early citation described it as the Gallant Old Party) [1], is one of the two major political parties in the United States. ... JFK redirects here. ... Federal courts Supreme Court Circuit Courts of Appeal District Courts Elections Presidential elections Midterm elections Political Parties Democratic Republican Third parties State & Local government Governors Legislatures (List) State Courts Local Government Other countries Atlas  Politics Portal      Further information: Politics of the United States#Organization of American political parties The Democratic... Ronald Wilson Reagan (February 6, 1911 – June 5, 2004) was the 40th President of the United States (1981–1989) and the 33rd Governor of California (1967–1975). ... Year 1990 (MCMXC) was a common year starting on Monday (link displays the 1990 Gregorian calendar). ... The Center on Budget and Policy Priorities (CBPP) describes itself as a policy organization . ... The Council of Economic Advisers (CEA) is a group of economists set up to advise the President of the United States. ... George Walker Bush (born July 6, 1946) is the 43rd and current President of the United States, inaugurated on January 20, 2001. ... The Heritage Foundation is a public policy research institute based in Washington, D.C., in the United States. ... Federal courts Supreme Court Circuit Courts of Appeal District Courts Elections Presidential elections Midterm elections Political Parties Democratic Republican Third parties State & Local government Governors Legislatures (List) State Courts Local Government Other countries Atlas  US Government Portal      A U.S. state is any one of the fifty subnational entities of... For other persons named William Richardson, see William Richardson (disambiguation). ...

See also: Trickle-down economics and Reaganomics

Trickle-down economics and trickle-down theory, in political rhetoric, are characterizations by opponents of the policy of lowering taxes on high incomes and business activity. ... Ronald Reagan, the US president from which Reaganomics derives its name Reaganomics (a blend of Reagan and economics, coined by radio broadcaster Paul Harvey) is a term that has been used to both describe and decry free market advocacy economic policies of U.S. President Ronald Reagan, who served from...

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. The Canadian Goods and Services Tax (GST) (French: Taxe sur les produits et services, TPS) is a multi-level value-added tax introduced in Canada on January 1, 1991, by Prime Minister Brian Mulroney and finance minister Michael Wilson. ...


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 In finance, a capital gain is profit that is realized from the sale of an asset that was previously purchased at a lower price. ... This article does not cite any references or sources. ... The Cato Institute is a libertarian think tank headquartered in Washington, D.C. The Institutes stated mission is to broaden the parameters of public policy debate to allow consideration of the traditional American principles of limited government, individual liberty, free markets, and peace by striving to achieve greater involvement...


Notes

  1. ^ a b Riedl, Brian (2007-01-29). Ten Myths About the Bush Tax Cuts. Heritage Foundation. Retrieved on 2007-07-17.
  2. ^ LaFaive, Michael (1997-11-01). Tax Cuts vs. Government Revenue. Mackinac Center for Public Policy. Retrieved on 2007-07-19.
  3. ^ Lambro, Donald (2004-02-04). Budget myths and mischief. The Washington Times. Retrieved on 2006-02-17.
  4. ^ Kogan, Richard (2003-03-03). Will the Tax Cuts Ultimately Pay for Themselves?. Center on Budget and Policy Priorities. Retrieved on 2007-07-19.
  5. ^ Riedl, Brian M. (2007-01-29). Ten Myths About the Bush Tax Cuts. The Heritage Foundation. Retrieved on 2007-02-12.
  6. ^ Welch, William; Bello, Marisol (2007-07-01). Dems call for ending tax cuts for rich. USA Today. Retrieved on 2007-07-19.
  7. ^ Kogan, Richard; Aron-Dine, Aviva (2006-07-27). Claim that Tax Cuts "Pay for Themselves" is Too Good to Be True. Center on Budget and Policy Priorities. Retrieved on 2007-07-19.
  8. ^ Magers, Phil (2003-02-19). New Mexico cuts taxes to stimulate economy. United Press International. Retrieved on 2007-02-12.

Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era in the 21st Century. ... is the 198th day of the year (199th in leap years) in the Gregorian calendar. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era in the 21st Century. ... is the 200th day of the year (201st in leap years) in the Gregorian calendar. ... Year 2006 (MMVI) was a common year starting on Sunday of the Gregorian calendar. ... is the 48th day of the year in the Gregorian calendar. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era in the 21st Century. ... is the 200th day of the year (201st in leap years) in the Gregorian calendar. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era in the 21st Century. ... is the 43rd day of the year in the Gregorian calendar. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era in the 21st Century. ... is the 200th day of the year (201st in leap years) in the Gregorian calendar. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era in the 21st Century. ... is the 200th day of the year (201st in leap years) in the Gregorian calendar. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era in the 21st Century. ... is the 43rd day of the year in the Gregorian calendar. ...

External links


  Results from FactBites:
 
Tax cut - Wikipedia, the free encyclopedia (893 words)
A tax cut is a reduction in the rate of tax charged by a government, for example on personal or corporate income.
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.
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.
TomPaine.com - A Tax Cut Like It's 1986 (920 words)
The House is still debating its tax cut bill, having postponed a vote so that they wouldn't be passing another tax cut for the wealthy in the same day they slashed funding for domestic safety net programs.
I don’t mean the big tax cuts for the rich that he put in place when he came into office; I mean the tax reform bill that he signed in 1986.
Taxing all income the same way meant that there was no money to be made by gaming the system—for example, by disguising wage income as capital gains income.
  More results at FactBites »

 
 

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