What effect does a tax cut has on the economy of a country?
- simplicitusLv 77 years agoFavorite Answer
It all depends on the state of the economy and what else changes.
And you can't say nothing else changes: either government spending stays the same, in which case government borrowing has to increase, of government spending drops.
Historically, dropping the tax rate on the top income tax bracket has reduced the growth rate of the U.S. economy:
And the countries with the highest standard of living have tax rates higher than the U.S. so it can't be that high taxes are necessarily bad for the economy.
The Bush tax cuts led to a major increase in government debt. The Reagan tax cuts would have, but he followed the tax cuts with tax increases to prevent some of that.
Lower taxes have also translated into lower tax revenues for investment. The U.S. has cut back on all sorts of investments: education, infrastructure, research, etc. The long term damage to the society and the economy of not providing children with the best education possible are incalculable.
The U.S. used to be the leader in education, in standard of living, etc. No longer.
Furthermore, even as a fiscal stimulus in dealing with a recession, cutting taxes is less effective than increased spending on investment, food stamps, etc.
If this is not the sort of answer you wanted; if you want the prediction of a simple macro-economic model rather than the real-world effects, then:
1. You should have said so in your post.
2. That is really too simple a question for you to need to ask.