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How Does the Government Use Tax Cuts?

Tax Cut

The United States tax system is a progressive levy that processes the levy based on an individuals income. Each taxpayer is placed under an appropriate tax bracket; each bracket possesses different percentages which demonstrate the amount of taxes the government is collecting. A tax cut therefore is a reduction in these tax rates.

Tax cuts have immediate effects which generally decrease the real income levied by the government agency and increase the real income of the individual or corporation who receives the tax cut. This relationship in the long run, however, eventually balances out for the loss of government income is mitigated through the leveling off of tax rates.

Tax rates depend on federal legislation and the viewpoints taken by the political party in office. Depending on the original tax rate, tax cuts can provide corporations and individuals with a legitimate incentive to invest in fixed-income securities or equities. An increase in investment stimulates the economy, this relationship reveals the long term economic effects of a tax cut on society.

Tax cuts have long been an economic resource utilized by many government agencies and political parties. It has long been theorized that tax cuts generate additional taxable income, which in the future, can yield more revenue. The increased income not only sparks incentives to invest, but also yields a higher tax rate for the upcoming taxable year.

That being said, the macroeconomic effects of a tax cute are not fully understood nor predictable. The confusion or ambiguity stems from the unpredictability associated with a tax payer's incentives or motives when they receive an increase in their net income. This principle is also applied to the government, for the operations under a reduced income of the particular cabinet are not assumed.

NEXT: The Difference Between State And Federal Taxes

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