Tax cut

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A tax cut typically represents a decrease in the amount of money taken from taxpayers to go towards government revenue. This decreases the revenue of the government and increases the disposable income of taxpayers. Tax rate cuts usually refer to reductions in the percentage of tax paid on income, goods and services. As they leave consumers with more disposable income, tax cuts are an example of an expansionary fiscal policy. Tax cuts also include reduction in tax in other ways, such as tax credit, deductions and loopholes.^[1]

However, sometimes a tax cut can increase tax revenue, as economist Thomas Sowell explains:

"What actually followed the cuts in tax rates in the 1920s were rising output, rising employment to produce that output, rising incomes as a result and rising tax revenues for the government because of the rising incomes, even though the tax rates had been lowered."^[2]

How a tax cut affects the economy depends on which tax is cut. Policies that increase disposable income for lower- and middle-income households are more likely to increase overall consumption and "hence stimulate the economy".^[3] Tax cuts in isolation boost the economy because they increase government borrowing. However, they are often accompanied by spending cuts or changes in monetary policy that can offset their stimulative effects.^[4]