Impact of tax cuts on Economy
The decrease in income tax rates results in an increase in spending by households, which in turn leads to an increase in aggregate demand. The supply-side effect of income tax cuts increases in incentives for work that results in higher productivity. This being the case price levels and GDP in the economy increases (Tax Policy Center, 2020).
In the figure below, as the aggregate demand curve shifts from AD to AD’ the price level increases from P to P’ and consequently GDP increases from Q to Q’. Resulting new equilibrium will be at E’.
Effect of tax cuts majorly depends on how it is financed, state of the economy and if it will result in higher productivity. I believe that tax cuts will help the economy as a whole. This is because the government funds the money into the state economy by giving and allowing loans to businesses. In turn, consumption by household raises thus increasing the standards of living. An example is the permanently lowered corporate tax rate in the United States, which makes the country more attractive for companies to locate investments. It has discouraged profit shifting to lower tax nations and hence making the United States globally competitive location for innovations and growth (World Economic Forum, 2020).
References
Tax Policy Center. (2020). What are the economic effects of the Tax Cuts and Jobs Act? Tax Policy Center. Retrieved 13 July 2020, from https://www.taxpolicycenter.org/briefing-book/what-are-economic-effects-tax-cuts-and-jobs-act.
World Economic Forum. (2020). Is corporation tax good or bad for growth?. World Economic Forum. Retrieved 13 July 2020, from https://www.weforum.org/agenda/2020/01/corporation-tax-good-or-bad-for-growth/.
