A tax cut is a reduction in the rate of tax charged by a government. 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 rates have 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 macroeconomic effects of a tax cut are generally not predictable 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. However, basic math states that cutting tax rates in half would require an economy twice the size to generate the same amount of tax revenue.
Tax cuts in the United States
A significant individual tax cut was proposed by President John F. Kennedy and signed into law by President Lyndon B. Johnson with the belief that cutting tax rates would stimulate investment and spending, with overall beneficial effects (including replenishment of some lost tax revenues). However, in recent decades, the majority of politicians favoring large tax cuts have been members of the Republican Party.
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 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 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".
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 has been 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. Bush has claimed that the tax cuts have paid for themselves but the Center on Budget and Policy Priorities argues that this is false.
Much discussion has occurred regarding the optimum capital gains tax rate, with some calling for reductions in the belief that a lower rate will provide investors an incentive to invest in new stocks—which supply siders claim encourages the creation of new jobs, reduces unemployment, and has the paradoxical effect of increasing tax revenue.
- Riedl, Brian (29 January 2007). "Ten Myths About the Bush Tax Cuts". The 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.
- Morgan, David; Becker, Amanda (December 1, 2017). "Senate approves major tax cuts in victory for Trump". Reuters. Retrieved December 2, 2017.