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How tax cuts help reviving the economy

A tax cut is an expansionary fiscal policy that deals with reduction in taxes. The immediate consequences of a tax cut are, usually, a decline in the actual revenue of the government and on the other hand an increase in the actual earnings of those individuals whose tax charge per unit has been decreased. However, in the long run, the decline in the government income may be extenuated, relying upon the reaction that tax-payers put together. Relying upon the original rate of taxation, tax cuts may supply corporations and individuals with a motivation for investments which in turn stimulate economic development.

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It has been speculated that reduction in tax rates can bring forth extra taxable income which could as well generate more returns as compared to when it was collected at an increased rate (Baumol & Blinder, 2008).

For the period of recessions, the government gives a tax cut occasionally as an economic incentive. Most economists appear to agree on the fact that tax cuts actually do offer an economic motivation. The actual justification may be attributed to the fact that the tax cuts encourage flexibility, for instance individuals who wish to exhaust more can employ their tax cut for that reason, like wise individuals who desire to put aside more can employ tax cuts to take over the new government bonds. This is the ideal situation during a downturn, when previous over-investment has brought about swollen inventory degrees and deprived private investment chances (Brenner, 2006).

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According to Mceachern (2009), the main economic wallop of any given change in the government financial plan is experienced by specific groups, for instance a tax cut for households with children increases their disposable earnings. Discussions of fiscal policy, on the other hand, center on the consequence of changes in the government financial plan on the entire economy. Even though changes in taxes or expenditure that are referred to as revenue neutral may be interpreted as fiscal policy and may influence the collective level of yield by changing the inducements that individuals or firms face, fiscal policy is generally used to explain the consequence on the comprehensive economy of the entire levels of taxation and spending, and more predominantly, the gap that exist between them.

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Tax cuts according to the theoretical projections by the tax multiplier effect, calculated with the geometric sequence, will gain temporarily instead of the long term, grounded exclusively on a tax cut alone, with no increment in the budget shortfall (The Atlanta Journal-Constitution, 2010).

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According to Meltzer & Hofheimer (2004), tax cuts are perceived as stimulating the economy in the similar manner that government spending does through increasing aggregate demand. Aggregate demand is the overall demand for ultimate services and commodities in the economy at a particular time and level of price. It is the quantity of goods and services within the economy that will be bought at all potential levels of price. Tax diminution would raise disposable revenue, resulting into an increase in consumption, the exact amount centering on the trivial tendency to consume.

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