Effect of reduction in income tax on multiplier
If income tax rate declines, the multiplier will go up. This is because the reduction in tax will increase the disposable income of the people. The increase in disposable income will increase the consumption level in the economy, which in turn induces the equilibrium level of GDP to increase. Thus, the reduction in income tax will cause the multiplier to go up.
Supply-side tax cuts
Supply-side tax cut refers to the tax cut that increases the aggregate supply.
The most appealing supply-side tax cuts and its support view
Income tax cut increases the incentive to work more. This in turn increases the supply of labor works, which increases the output.
Tax cut on the interest and dividends increases the investment on such assets. This increase in investment increases the employment and output.
Capital gain refers to the sale of assets for profit. Tax cut on the capital gains increases the investment, which in turn increases the output.
Tax cut on the corporate income tax gives more incentives to increase profit. To get more profit, investment will increase. This increase in investment leads to an increase in the income and output.
Critics of the supply-side tax cut
The historical evidence shows that the tax cut on interest and dividends fails to increase the investment in such assets.
The tax cut on income increases not only the working hours but also the disposable income, which increases the demand for goods and services. Hence, the impact of reducing income tax is not greater for the supply side but for the demand side.
The tax cut on capital gains and corporate income will take more time to realize the incentives since the returns from the investment will take more time. Hence, this fails to increase the investment.
This supply-side tax cut increases the income inequality. The supply-side tax cut gives more incentives to the rich people to increase the investment, which in turn increases the wealth of the rich persons.
This supply-side tax cut decreases the government revenue, which leads to an increase in the budget deficit since it involves huge tax amount.
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