Tax cut

Taxation

An aspect of fiscal policy
Policies Government revenue Tax revenue Non-tax revenue Tax law Tax bracket Tax threshold Exemption Credit Deduction Tax shift Tax cut Tax holiday Tax advantage Tax incentive Tax reform Tax harmonization Tax competition Double taxation Representation Unions Medical savings account Tax, tariff and trade
Economics Price effect Excess burden Tax incidence Laffer curve Optimal tax Theory Optimal capital income taxation
Collection Revenue service Revenue stamp Tax assessment Taxable income Tax lien Tax refund Tax shield Tax residence Tax preparation Tax investigation Tax shelter Private tax collection Tax farming
Noncompliance Tax avoidance Tax evasion Tax resistance Tax haven Smuggling Black market Transfer mispricing Unreported employment Tax shelter
Distribution Tax rate Progressive Regressive Proportional
Types Direct Indirect Per unit Ad valorem In rem Capital gains Carbon Consumption Dividend Ecotax Excise Fuel Georgist Gift Gross receipts Income Inheritance (estate) Land value Payroll Pigovian Property Sales Sin Single Stamp Steering Turnover Value-added (VAT) Corporate profit Excess profits Windfall profits Negative (income) Flat Wealth
International Financial transaction tax Currency transaction tax Tobin tax Spahn tax Tax equalization Tax treaty Permanent establishment Transfer pricing European Union FTT
Trade Custom Duty Tariff Import Export Tariff war Free trade Free trade zone Trade agreement
Religious Church tax Eight per thousand Teind Tithe Fiscus Judaicus Leibzoll Temple tax Tolerance tax Jizya Kharaj Khums Nisab Zakat
By country List of countries by tax rates Tax revenues as %GDP Albania Algeria Argentina Australia Azerbaijan Bangladesh Bhutan Bulgaria Canada China Colombia France Germany Greece Iceland India Indonesia Iran Ireland Israel Italy Japan Kazakhstan Lithuania Malta Namibia Netherlands New Zealand Norway Pakistan Palestinian territories Peru Philippines Poland Russia Singapore South Africa Sweden Switzerland Tanzania United Kingdom United States Uruguay

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. Due to the perceived benefit in growing real incomes among tax payers, politicians have sought to claim their proposed tax credits as tax cuts. In the longer term, however, the loss of government income may be mitigated, depending on the response of tax-payers. 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.

Depending on the original tax rate, tax cuts may provide individuals and corporations with an incentive investments which stimulate economic activity. Some politically conservative opinion-makers, such as Art Laffer, have theorized that this could generate so much additional taxable income that a lower tax can generate more revenue than was collected at the higher rate.

Economics

In Keynesian economics, a tax cut has the effect of increasing GDP via the fiscal multiplier. Theories which incorporate Ricardian equivalence such as the real business cycle theory however have tax cuts producing no or little change in national income. In these models, agents anticipate future tax rises to pay for government spending and cut their own spending. In New Keynesian economics, tax cuts give a greater stimulus to the economy than that of increases in government spending.

Tax cuts in the United States

In 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 Democratic Congress under another Democratic president, Lyndon B. Johnson) 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, 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.^[2] 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 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.^[3] 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 argue 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]

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".^[1] The conservative think tank the Heritage Foundation has claimed that the Bush tax cuts have led to the rich shouldering more of the income tax burden and the poor shouldering less;^[5] while the Center on Budget and Policy Priorities states that the tax cuts have conferred the "largest benefits, by far on the highest income households."^[6] Bush is criticized for giving tax cuts to the rich and capital gains tax breaks, but some benefit extended to middle and lower income brackets as well.^[7] Bush has claimed that the tax cuts have paid for themselves but the Center on Budget and Policy Priorities argues that this is false.^[8] At the state level, former Democratic Governor Bill Richardson in recent years has supported tax cuts to spur economic growth.^[9]

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).

Notes

1 2 Riedl, Brian (29 January 2007). "Ten Myths About the Bush Tax Cuts". Heritage Foundation. Retrieved 17 July 2007.
↑ LaFaive, Michael (1 November 1997). "Tax Cuts vs. Government Revenue". Mackinac Center for Public Policy. Retrieved 19 July 2007.
↑ Lambro, Donald (4 February 2004). "Budget myths and mischief". The Washington Times. Retrieved 17 February 2006.
↑ Kogan, Richard (3 March 2003). "Will the Tax Cuts Ultimately Pay for Themselves?". Center on Budget and Policy Priorities. Retrieved 19 July 2007.
↑ Riedl, Brian M. (29 January 2007). "Ten Myths About the Bush Tax Cuts". The Heritage Foundation. Retrieved 12 February 2007.
↑ Friedman, Joel; Shapiro, Isaac (23 April 2004). "Tax Returns: A Comprehensive Assessment of the Bush Administration's Record on Cutting Taxes". Center on Budget and Policy Priorities. Retrieved 1 July 2010.
↑ Welch, William; Bello, Marisol (1 July 2007). "Dems call for ending tax cuts for rich". USA Today. Retrieved 19 July 2007.
↑ Kogan, Richard; Aron-Dine, Aviva (27 July 2006). "Claim that Tax Cuts "Pay for Themselves" is Too Good to Be True". Center on Budget and Policy Priorities. Retrieved 19 July 2007.
↑ Magers, Phil (19 February 2003). "New Mexico cuts taxes to stimulate economy". United Press International. Retrieved 12 February 2007.

External links

This article is issued from Wikipedia - version of the Tuesday, March 22, 2016. The text is available under the Creative Commons Attribution/Share Alike but additional terms may apply for the media files.