Friday, January 19, 2007

Tax Cuts

This is a minor, but very important point that I recently saw enunciated quite well. When the government "cuts taxes", what it is really doing is cutting the tax rate. As we've seen recently, these tax rate cuts actually results in increased tax revenue.

This is an extremely important point to keep in mind when considering courses of action designed to help the economy and balance the federal (or any other government) budget. As we've seen, a tax rate cut a) helps the economy and all of the actors (individuals and businesses) in it since they have to give a smaller percentage of their income to the government (which means, no matter whether the actor has the same pre-tax income as before, less, or more, that the actor ends up with more dollars at the end of the day)
, and b) actually helps the government by increasing the amount of revenue it has at its disposal.

One possible phenomenon that could negate (b), though, would be if somehow decreasing the tax rate increased the government's expenses. I have never read anything to suggest that this happens, nor can I think of anything off the top of my head, but I suppose, in theory, it is possible.


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