A tax cut typically represents a decrease in the amount of money taken from taxpayers to go towards government revenue.
As they leave consumers with more disposable income, tax cuts are an example of an expansionary fiscal policy.
For this reason, the structure of the tax cut and the way it is financed is crucial for achieving economic growth.
Corporate income tax cuts generate sustained effects on research and development (R&D) expenditures, productivity, and output, therefore increasing GDP.
The key to evaluating the effect of personal income tax cut is the variable of labor utilization.
Lower VAT rates reduce immediate government revenue, potentially impacting public services and infrastructure.
However, it's essential to recognize that the main drawback of a VAT reduction lies in the fact that suppliers are not obligated to pass those savings directly to consumers.
The tax cuts can boost the economy in the short term; however, these effects are never strong enough to prevent loss of revenue.
Thus, the gap needs to be compensated and financed by an increase in public debt, raising other taxes, or cutting spending.
In the boom, the borrowing may result in crowding out – a situation in which the private sector has fewer finances for their investments as they buy the bonds.
[11] When the middle or upper class receives tax cuts, they often spend more money on the services which are provided by low-income individuals.
On the other hand, targeting the middle class with tax cuts reduces income inequality and polarization but may provide lower dividends from growth.
Lyndon B. Johnson supported Kennedy's ideas and lowered the top income tax rate from 91% to 70%.
[19] While the TRA aimed for efficiency and fairness, it did not fully offset the revenue losses from previous tax cuts.
To prevent the fiscal cliff in 2013, Obama extended the Bush tax cuts on incomes below $400,000 for individuals and $450,000 for married couples.
His 2025 budget includes tax breaks for millions of families, low-income workers, and senior citizens.
One significant proposal is the revival of the expanded Child Tax Credit (CTC), which helped lift millions of children out of poverty during the pandemic.
These cuts aimed to encourage work, entrepreneurship, and investment, ultimately stimulating economic growth.
[29] To offset the revenue loss from income tax cuts, Thatcher's administration raised the VAT rate from 8% to 15%.
These cuts aimed to enhance the UK's competitiveness, attract investment, and foster business growth.
While the tax cuts spurred economic activity, critics[31] argued that they disproportionately benefited the wealthy.
[32] During his tenure as Chancellor of Germany from 1998 to 2005, Gerhard Schröder implemented significant tax cut policies aimed at stimulating economic growth and improving the country's competitiveness.
Schröder planned to pay for these tax cuts through a combination of measures: reducing subsidies, privatization revenues, and increasing state debt.
[33] However, Schröder faced criticism and pressure to denounce his business and political ties to Russia, particularly in light of Moscow's war in Ukraine.
Despite the controversies, Schröder's tax policies left a lasting impact on Germany's fiscal landscape.
[34] Javier Milei's tax cut policies were aimed at transforming the country's financial landscape.
The Fiscal Multiplier and Economic Policy Analysis in the United States, a 2015 study by J. Whalen and F. Reichling, focused on the short-term effects of tax cuts and the potential of the economy.
On the other hand, if the economy performs further from the economic potential and is bounded by zero interest rates the effect of fiscal stimuli is much higher.
The study has shown the large differences between the low and high estimates of the multipliers effect of tax cuts.
On the other hand, the study indicated that government spending is a more reliable form of fiscal policy than tax cuts.