Question

There has been discussion about whether the Tax Cuts and Jobs Act that took effect in 2018 will increase tax revenue. Tax revenue can be thought of an as average tax rate multiplied by taxable income. If the average tax rate falls while taxable income stays the same, tax revenue will fall. But what if the tax cuts increase taxable income? Both of the major schools of thought in macroeconomics (Keynesiansand Neoclassicals) believe that tax cuts increase economic growth. Economic growth increases taxable income. Our recent economic growth has brought unemployment down to historically low levels.

Think about this. Reply to these questions to begin your discussion:

Do you think that the tax cuts of the Tax Cuts and Jobs Act will increase economic growth and taxable income so much that tax revenue will increase?

Or do you think that the tax cuts will reduce tax revenue? Explain your answers.

Answer 1

When a tax cut takes place, then it increases economic activities and government collects more tax revenues even if the tax rate has been decreased. It happens with a series of economic activities. When a tax rate decreases, then it increases the disposable income of the consumers and they spend more. It creates more demand in the economy and to cater this demand, supply increases. It creates new jobs and more people are employed and willing to spend. So, real GDP increases and income level of people also increases. It makes higher tax revenue collection even if the tax rate is lower.

So, decrease in tax rates, helps in increase in tax revenues.