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What Makes Tax Cuts Effective?

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Summary:In most cases, tax cuts cause an increase in generated tax revenue.This is because people have more money to spend in the economy, and as the money changes hands it gives more people the opportunity to engage in activities that can be taxed.A concrete, simplified example is given of how this occurs.

Tax cuts are nearly always effective, in that a tax cut results in an increase in revenue to the taxing entity. In some instances tax cuts may not be effective, but those instances are few. To give an example of one of these few instances—if the current tax rate is 1 percent, and the amount of money to be taxed is 1 billion dollars, and if the tax is reduced to 0 percent, the difference is 10 million dollars of lost revenue.

Tax cuts, however, are nearly never from 1% down to 0%. There is in every instance a ‘break-even point’ at which reducing taxes brings in less revenue. Currently, however, most taxing schemes are far above such a break-even point. In other words, most tax ra…