Tax cut

A tax cut is a reduction in taxes. The immediate effects of a tax cut are a decrease in the real income of the government and an increase in the real income of those whose tax rate has been lowered. Due to the perceived benefit in growing real incomes among tax payers, politicians have sought to claim their proposed tax credits as tax cuts. In the longer term, however, the loss of government income may be mitigated, depending on the response of tax-payers. The longer-term macroeconomic effects of a tax cut are not predictable in general, because they depend on how the taxpayers use their additional income and how the government adjusts to its reduced income.

Depending on the original tax rate, tax cuts may provide individuals and corporations with an incentive investments which stimulate economic activity. Some politically conservative opinion-makers, such as Art Laffer, have theorized that this could generate so much additional taxable income that a lower tax can generate more revenue than was collected at the higher rate.

In Keynesian economics, a tax cut has the effect of increasing GDP via the fiscal multiplier. Theories which incorporate Ricardian equivalence such as the real business cycle theory however have tax cuts producing no or little change in national income. In these models, agents anticipate future tax rises to pay for government spending and cut their own spending. In New Keynesian economics, tax cuts give a greater stimulus to the economy than that of increases in government spending.

In recent decades, most "supply-siders" in the United States have been Republicans (though a significant individual tax cut was proposed by President John F. Kennedy from the Democratic Party and passed by a Democratic Congress under another Democratic president, Lyndon B. Johnson) with the belief that cutting the tax rate would stimulate investment and spending, with overall beneficial effects (including replenishment of some lost tax revenues).

...
Wikipedia