Tax cuts

Tax cuts often provide a stimulus to the economy, because they reduce the cost of doing business and allow ordinary citizens to spend or save or invest more of their own money. They give incentives to work, save, and invest, thus creating jobs and increasing economic growth. [1]

When tax rates have been raised beyond the point of diminishing returns cutting a tax rate will result in a net increase of tax revenue. This may seem paradoxical but can be easily explained by the fact that lowering taxes can stimulate the economy. The best example is the tax on capital gains. This phenomenon is described by the Laffer curve, which states there exists a point when increasing taxes actually decreases tax revenue.

Laffer wrote:

• Because tax cuts create an incentive to increase output, employment, and production, they also help balance the budget by reducing means-tested government expenditures. A faster-growing economy means lower unemployment and higher incomes, resulting in reduced unemployment benefits and other social welfare programs. The Laffer Curve: Past, Present, and Future - Arthur Laffer - June 1, 2004

Notes

See also:

• Tax rates and tax revenues