Do tax cuts raise or lower the interest rate?

Update:

And IF consumption went up because of a tax cut, would the interest rate be higher or lower?

4 Answers

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  • 10 years ago
    Favorite Answer

    Tax cuts are fiscal policy, not monetary policy and do not directly rise or lower interest rates. Interest rates, however, are subject to two different forces - supply and demand of money and secondarily, Fed Reserve policies (which affect monetary supply). As has been mentioned, a tax rate cut should, in theory, put more money into the economy as people take the money associated with the tax cut (through lowered withholdings) and spend it. However, where I disagree with the other poster is here - by placing more money in the economy, you would drive down interest rates - more money should lower the demand for loans, which means that banks will be sitting on cash reserves they can't lend out - much like a retailer who sits on excess inventory, the way to get rid of excess inventory is to lower price, which for banks means lower interest rates. Similarly, when the Fed wants to expand the money supply, they lower interest rates to induce banks to lower interest rates which induces more people to borrow.

  • jarvie
    Lv 4
    4 years ago

    Tax cuts places greater funds into workers' wallet, which stimulates the financial device, and places people returned to artwork. while people initiate doing "too good" the Feds subject approximately inflation. So raising the expenditures of interest cuts the financial device returned.

  • 10 years ago

    they should in theory raise interest rates.because tax cuts should put more money on the streets, which would raise rates

    but Bush tax cuts for the rich ...the rich dont put their windfall into the economy..they take it out, so thats where the theory breaks down

  • tro
    Lv 7
    10 years ago

    the interest rate is based on the quarterly reports from the Federal Reserve

    if you notice much attention is paid to that report each quarter to more or less give some indication the state of the economy

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