Tax Cut

Decision Points

A tax cut is a reduction in taxes. The immediate effects of a tax cut are 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 loss of government income may be mitigated, 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 economic activity. It has been theorized that this can generate additional taxable income which could generate more revenue than the was collected at the higher rate 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.

n recent decades, most "supply-siders" in the United States have been Republicans (though a significant individual tax cut was proposed by President John F. Kennedy from the Democratic Party and passed by a Democrat led congress) with the belief that cutting the tax rate would stimulate investment and spending, with overall beneficial effects (including replenishment of some lost tax revenues). President Ronald Reagan signed tax cuts into law, which some believe stimulated a doubling in total tax revenues (from five hundred billion to one trillion dollars) during the period from 1980 to 1990. However, during this period the deficit and national debt more than tripled (from $908 billion in 1980 to $3.2 trillion in 1990) because government spending rose even faster than increases in tax revenue. As a result, income tax receipts as a percent of GDP fell from 11.3% in 1981 to 9.3% in 1984 and did not to revert back to original levels until the late 1990s, even though overall revenue skyrocketed in terms of real dollars. Some supply-siders like Don Lambro of the Washington Times credit the Reagan tax cuts with the eventual surpluses of the late 1990s. Others doubt this claim however and instead believe the surpluses were a result of a combination of a decrease in government spending, the passing of the Omnibus Budget Reconciliation Act of 1993 (which dictated several tax increases), and the use of the PAYGO (pay-as-you-go) system. 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". President George W. Bush signed two major tax cuts into law; one in 2001 and one in 2003. These are often collectively referred to as the "Bush Tax Cuts". A conservative think tank called 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; while the Center on Budget and Policy Priorities claims that the tax cuts have conferred the "largest benefits,by far on the highest income households." Bush is criticized for giving tax cuts to the rich with capital gains tax breaks, but some benefit extended to middle and lower income brackets as well. Bush has claimed that the tax cuts have paid for themselves but critics argue that this is false. At the state level, Democratic Governor Bill Richardson in recent years has supported tax cuts to spur economic growth. The most recent significant tax cuts were signed into law by Barack Obama as part of the American Recovery and Reinvestment Act of 2009 (ARRA). Of the $700 Billion cost of ARRA, roughly $288 Billion were tax cuts.

Souce: wikipedia