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Do Tax Cuts Stimulate the Economy Cutting taxes by federal state and local governments will always stimulate the economy in any economic environment It seems that the debate on the pros and cons of cutting taxes is more prominent during a recession or downturn in the economy as is the case now but tax cuts should always be a top priority for everyone from politicians to voters The most recent presidential proposal is the Bush Stimulus Package based on his vision for economic recovery low taxes low spending on social services high military spending Under his view reducing tax rates for businesses and rich individuals stimulates investment Keen 2003 p A5 Taxes are only one of many factors that affect the economy National security the possibility of war and the insecurity of investors are a few other factors but since the tragedy of 9-11 the economy has been in a downturn and continues to tumble It needs something to turn it around and tax cuts are one of the solutions needed but combining tax cuts with other solutions will help stimulate the economy much faster The theory of tax cuts stimulating the economy is referred to by most people as supply-side economics as well as several other names such as trickle-down economics or Reaganomics During the Ronald Reagan presidency it became known as Reaganomics but many people today use the terms interchangeably The central concept of supply-side economics is that cuts in the tax rates spur economic growth by providing entrepreneurs an incentive to invest the extra tax dollars saved by tax cuts causing many of them to earn more money and pay more taxes on their earnings even at a lower tax rate which creates new jobs These new jobs result in a larger employment base and therefore more taxpayers There are more taxpayers because of the newly created jobs therefore a larger tax base which means higher tax revenues for the government
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