Tax cut
Encyclopedia
A tax cut is a reduction in tax
es. 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 credit
s as tax cuts. In the longer term, however, the loss of government income may be mitigated, depending on the response of tax-payers. Depending on the original tax rate, tax cuts may provide individuals and corporations with an incentive investments which stimulate economic activity. Politically Conservative opinion-makers have theorized that this can generate additional taxable income which could generate more revenue than was collected at the higher rate, although this view is almost universally rejected by economists r.
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.
If government does reduce its expenditure to accommodate tax cuts, there must necessarily be reductions in government services, and there may also be a reduction of the government's capacity to redistribute income to reduce income inequalities. Critics of tax cuts argue that this leads to a fall in overall economic welfare because the effects fall disproportionately on those with the lowest incomes.
" 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 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). 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. 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 back 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. 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
argues 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". 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
". 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; 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." Bush is criticized for giving tax cuts to the rich with capital gains tax breaks, but some benefit extended to middle and lower income brackets as well. Bush has claimed that the tax cuts have paid for themselves but critics argue that this is false. At the state
level, Democratic Governor Bill Richardson in recent years has supported tax cuts to spur economic growth.
). In addition, a recent report issued by the Cato Institute
argues that the burden of capital gains tax is felt by the poor much more than the rich. The report quotes a painting contractor as saying: "You're looking at a poor man who thinks the capital gains tax cut is the best thing that could happen to this country, because that's when the work will come back. People say capital gains are for the rich, but I've never been hired by a poor man."
Advice for exchange students in the U.S. (J1 and F visas) on how to legally cut some taxes
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
es. 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 credit
Tax credit
A tax credit is a sum deducted from the total amount a taxpayer owes to the state. A tax credit may be granted for various types of taxes, such as an income tax, property tax, or VAT. It may be granted in recognition of taxes already paid, as a subsidy, or to encourage investment or other behaviors...
s as tax cuts. In the longer term, however, the loss of government income may be mitigated, depending on the response of tax-payers. Depending on the original tax rate, tax cuts may provide individuals and corporations with an incentive investments which stimulate economic activity. Politically Conservative opinion-makers have theorized that this can generate additional taxable income which could generate more revenue than was collected at the higher rate, although this view is almost universally rejected by economists r.
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.
Keynesian view
After tax income and the incentive to increase income will decline as income grows. Thus, a decline in taxes when taxes are already high may have a larger stimulative effect than if taxes were decreased by the same amount from a low rate.If government does reduce its expenditure to accommodate tax cuts, there must necessarily be reductions in government services, and there may also be a reduction of the government's capacity to redistribute income to reduce income inequalities. Critics of tax cuts argue that this leads to a fall in overall economic welfare because the effects fall disproportionately on those with the lowest incomes.
Tax cuts in the United States
In recent decades, most "supply-sidersSupply-side economics
Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing...
" in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
have been Republicans (though a significant individual tax cut was proposed by President John F. Kennedy
John F. Kennedy
John Fitzgerald "Jack" Kennedy , often referred to by his initials JFK, was the 35th President of the United States, serving from 1961 until his assassination in 1963....
from the Democratic Party
Democratic Party (United States)
The Democratic Party is one of two major contemporary political parties in the United States, along with the Republican Party. The party's socially liberal and progressive platform is largely considered center-left in the U.S. political spectrum. The party has the lengthiest record of continuous...
and passed by a Democratic Congress under another Democratic president, Lyndon 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). President Ronald Reagan
Ronald Reagan
Ronald Wilson Reagan was the 40th President of the United States , the 33rd Governor of California and, prior to that, a radio, film and television actor....
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. 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 back 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. 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
Omnibus Budget Reconciliation Act of 1993
The Omnibus Budget Reconciliation Act of 1993 was federal law that was enacted by the 103rd United States Congress and signed into law by President Bill Clinton. It has also been referred to, unofficially, as the Deficit Reduction Act of 1993...
(which dictated several tax increases), and the use of the PAYGO
PAYGO
PAYGO is the practice in the United States of financing expenditures with funds that are currently available rather than borrowed.-Budgeting:The PAYGO compels new spending or tax changes not to add to the federal deficit. Not to be confused with pay-as-you-go financing, which is when a government...
(pay-as-you-go) system. The Center on Budget and Policy Priorities
Center on Budget and Policy Priorities
The Center on Budget and Policy Priorities is a non-profit think tank that describes itself as a "policy organization ... working at the federal and state levels on fiscal policy and public programs that affect low- and moderate-income families and individuals."The Center examines the short- and...
and President’s Council of Economic Advisers
Council of Economic Advisers
The Council of Economic Advisers is an agency within the Executive Office of the President that advises the President of the United States on economic policy...
argues 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". President George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
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
Bush tax cuts
The Bush tax cuts refers to changes to the United States tax code passed during the presidency of George W. Bush and extended during the presidency of Barack Obama that generally lowered tax rates and revised the code specifying taxation in the United States...
". The conservative think tank
Think tank
A think tank is an organization that conducts research and engages in advocacy in areas such as social policy, political strategy, economics, military, and technology issues. Most think tanks are non-profit organizations, which some countries such as the United States and Canada provide with tax...
the Heritage Foundation
Heritage Foundation
The Heritage Foundation is a conservative American think tank based in Washington, D.C. Heritage's stated mission is to "formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong...
has claimed that the Bush tax cuts have led to the rich shouldering more of the income tax burden and the poor shouldering less; while the Center on Budget and Policy Priorities
Center on Budget and Policy Priorities
The Center on Budget and Policy Priorities is a non-profit think tank that describes itself as a "policy organization ... working at the federal and state levels on fiscal policy and public programs that affect low- and moderate-income families and individuals."The Center examines the short- and...
states that the tax cuts have conferred the "largest benefits,by far on the highest income households." Bush is criticized for giving tax cuts to the rich with capital gains tax breaks, but some benefit extended to middle and lower income brackets as well. Bush has claimed that the tax cuts have paid for themselves but critics argue that this is false. At the state
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
level, Democratic Governor Bill Richardson in recent years has supported tax cuts to spur economic growth.
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 curveLaffer curve
In economics, the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity . The curve is constructed by thought experiment...
). In addition, a recent report issued by the Cato Institute
Cato Institute
The Cato Institute is a libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Edward H. Crane, who remains president and CEO, and Charles Koch, chairman of the board and chief executive officer of the conglomerate Koch Industries, Inc., the largest privately held...
argues that the burden of capital gains tax is felt by the poor much more than the rich. The report quotes a painting contractor as saying: "You're looking at a poor man who thinks the capital gains tax cut is the best thing that could happen to this country, because that's when the work will come back. People say capital gains are for the rich, but I've never been hired by a poor man."
See also
- Laffer curveLaffer curveIn economics, the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity . The curve is constructed by thought experiment...
- Rahn curveRahn curveThe Rahn curve is an economic theory, developed by Richard Rahn, which proposes that there is a level of government spending which maximises economic growth. The theory is used by classical liberals to argue for a decrease in overall government spending and taxation...
- ReaganomicsReaganomicsReaganomics refers to the economic policies promoted by the U.S. President Ronald Reagan during the 1980s, also known as supply-side economics and called trickle-down economics, particularly by critics...
- Starve the beastStarve the beast"Starving the beast" is a fiscal-political strategy of some American conservatives to cut taxes in order to deprive the government of revenue in a deliberate effort to create a fiscal budget crisis that would then force the federal government to reduce spending...
- Trickle-down economicsTrickle-down economics"Trickle-down economics" and "the trickle-down theory" are terms used in United States politics to refer to the idea that tax breaks or other economic benefits provided by government to businesses and the wealthy will benefit poorer members of society by improving the economy as a whole...
- S corporationS CorporationAn S corporation, for United States federal income tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code....
External links
Advice for exchange students in the U.S. (J1 and F visas) on how to legally cut some taxes