Tax cut

{{Economics}}
A '''"tax cut"''' is an umbrella term to describe a [[government]] unit decreasing any of its [[tax]] rates. For example, the [[George W. Bush|Bush]] tax cuts were cuts that reduced income tax rates of upper-income, capital-owning households.

==Effects==
In the short term, tax cuts have the effect of lowering the government's revenue and raising the real income of those affected by the cut. [[Economics|Economists]] debate the validity and applicability of hypotheses like the [[Laffer curve]], which holds that when the stars are right, tax cuts can result in ''raising'' the government's revenue because of increases in economic activity. When looking at the US, there is little evidence for this assertion: During the Clinton years, tax ''increases'' went along with a booming economy; under Bush, a substantial tax cut failed to achieve even remotely similar growth and government revenue stayed well below the 2000 projections.<ref>Paul Krugman: [http://krugman.blogs.nytimes.com/2010/07/13/invincible-ignorance/ Invincible Ignorance], NYT</ref> President Obama not only extended the Bush tax cuts, but added additional tax cuts claiming the boost was necessary to keep the recovery going.<ref>[http://www.whitehouse.gov/blog/2011/12/23/president-obama-extending-payroll-tax-cut-boost-we-need-right-now whitehouse.gov]</ref><ref>[http://www.americanprogress.org/issues/economy/news/2011/11/30/10704/payroll-tax-cuts-by-the-numbers-state-by-state-analysis/ americanprogress.org]</ref>

Another problem is that government spending levels can't be as easily adjusted, and spending cuts seldom go along with lagging revenue. Tax-funded social and welfare programs are popular, education and infrastructure spending is crucial for a country's long-term economic outlook, and many people (especially on the right) also favor high levels of military spending. Thus, tax cuts tend to result in staggering deficits - Presidents Reagan and George W. Bush are among the worst offenders here, while the "tax-and-spend liberal" Clinton left office with a budget surplus.

===Effects on corporations===
Essentially, lower tax rate increases the effect of debt in the overall cost of capital, from {{wpl|Modigliani–Miller theorem||.}} Thus, as taxes are lowered, the {{wpl|weighted average cost of capital}} increases, creating a disincentive for the corporations to expand. As a result, whatever money the corporation has left over that isn't used to pay taxes are usually distributed in the form of dividends.<ref group=note>Apart from amount spent through management malfeasance, such as empire building or pet projects that has no significant value to the company or shareholders in general.</ref> To be fair, some of these amounts go to people's retirement funds through ownership by investment funds that owns these company. However, there is one significant issue here: most of these funds do not own a significant portion of the company to determine how much, when to distribute, or whether to distribute in the first place.<ref group=note>Growth funds, for example, prefers the company they own to save the money for expansion.</ref>

===Effects on investments===
Given all else equal, lowering tax rate generally<ref group=note>Obvious exceptions exist, such as the investments held in [[tax-exempt]] accounts.</ref> ''increases'' investment risk. You heard it right. It causes investments to be riskier. That is because the losses can be used to reduce taxable income in most jurisdictions.

==Perpetual tax-cutting mechanism==
[[Republicans]] tend to believe, for some odd reason, that you can keep reducing the level of taxation repeatedly, indefinitely.<ref group=note>Otherwise, why would every last one of those Republican-nominated presidential candidates since [[Ronald Reagan]] candidate talk about tax cuts?</ref> This may be due to the notion that one of their economic advisers invented the [[Laffer curve]], which makes the assertion that if you drop taxes, tax receipts will actually go ''up''. Unfortunately, the 
church of tax cuts
 Reagan Administration interpreted the curve wrong: the taxes were too ''low'' for maximum revenue at that time, not too high, so when they cut taxes, the revenue went down.<ref>[http://www.cbo.gov/ftpdocs/100xx/doc10014/Chapter1.5.1.shtml#1099167 The CBO's handy graph of revenues]</ref><ref>[http://www.time.com/time/magazine/article/0,9171,1692027,00.html A ''Time'' article] compiling various sources</ref> While some of this loss was indeed recouped through economic growth, tax receipts grew much more slowly after the Reagan tax cuts than after increases under [[Bill Clinton]].<ref>[http://www.cbpp.org/cms/?fa=view&id=119 From the "Center on Budget and Policy Priorities"]</ref>

Still, nowadays a Republican who wants to get anywhere in his career will pretty much have to sign [[Grover Norquist]]'s pledge never to raise taxes,<ref>Americans for Tax Reform: [http://www.atr.org/current-list-taxpayer-protection-pledge-signers-a5597 Current List of Taxpayer Protection Pledge Signers for the 112th Congress]</ref> and invariably, their proposed response to economic downturns will be new rounds of tax cuts. It doesn't take a math genius to figure out that even if the Laffer Curve were correct, the combination of these principles would steadily drive tax rates and revenues towards the 0% point, inevitably resulting in bankruptcy.

==See also==
*[[Tax]]
*[[Starve the beast]]
*[[Republican Party]]

==Notes==
{{reflist|group=note}}

==References==
{{reflist|2}}

[[Category:Economics]]
[[Category:Political strategery]]
[[Category:Political terms]]
[[Category:Tax]]

Categories: Economics, Political strategery, Political terms, Tax