There’s been a lot of talk about tax lately. While some advocate lowering it, others are adamant that taxing has a more significant issue of whether it treats everyone equally or not. Of course, there are also those who think taxes should be increased.
Numerous studies, as well as real-life examples in various countries, prove that lowering taxation on a national and state level is economically prosperous. However, some people have trouble wrapping their minds around that. When faced with difficult times, shouldn’t states and the entire country increase the tax, so everyone contributes?
In short – no.
Tax cuts boost economic growth
More than once, administering tax cuts has successfully helped the economy along. The answer to “why and how” is rather simple. Let’s break it down in layman terms. If we give people more money to spend, they will buy more things. That, in turn, boosts economic growth. Simple, right?
Of course, the mechanics of how lowering taxation improves the economy are more complex than that. However, this relationship is by no means guaranteed. Cutting taxes is not a perfect one-move-solves-everything type of solution.
In order for tax cuts to be an ideal solution that will guarantee a significant economic growth, they have to be followed by spending cuts. What’s more, it can’t be just any spending cuts. People have to cut “unproductive” spending and focus their excess money and invest it in the right economic areas.
That is also one of the reasons why some justify cutting the taxes for the upper tax bracket (the wealthy, top 5% of citizens). The rich are more likely to invest the “excess” money they have from tax cuts and boost the economy. What’s more, they will be spending and investing much larger sums that the rest of us “regular folk.”
The type of tax cut also plays a significant role
Not all tax cuts will have the same results when it comes to boosting the economy. This fact tells quite a different tale than the one we already mentioned. Namely, it advocates cutting taxes to the middle and lower tax brackets, rather than letting the wealthy off the hook.
Why? Because people who have less money, and operate on a paycheck-to-paycheck basis are more likely to spend the extra hundred or a few hundred dollars they get from a tax cut. Therefore, they are more likely to “give back” to the economy.
Either way, it’s clear that cutting taxes will, ultimately, boost the economy. However, the fact remains – it’s not a fool-proof solution that will solve all problems.