Some analysts believe lower tax rates increases tax revenue.
Governments raise revenue through taxation and by charging for services. The majority of revenue, however, comes from taxes. Economists are divided on whether or not decreasing the tax rate actually succeeds in raising revenue. Historically, decreased tax rates have brought in increased revenue, but other factors may have had an effect. There is no way to know for certain if lowering the tax rate will succeed in bringing in more revenue to the government.
Opinions
When tax cuts are implemented, some economists believe more tax revenue is generated. According to this line of reasoning, when taxpayers have more money (due to a reduction in the tax rate), they spend the money. Since more money is available in the economy, this benefits businesses by increasing sales. The businesses, having more money due to increased sales, hire more workers. These workers, being taxed, put more money into the federal system. There is no common consensus among economists as to whether or not this is true.
Economic Downturn
One time when decreasing tax rates affects tax revenue is during an economic downturn. When businesses struggle to make payroll, lowering tax rates may result in increasing revenue. However, there is no guarantee that businesses will use money saved with decreased tax rates to hire more workers. Businesses may simply use that money to pay off debts or even to upgrade equipment so fewer workers are needed to maintain the status quo. Without any assurances about how additional money is spent, it is impossible to be certain if decreasing the tax rate would create more jobs and potentially raise more revenue.
Different Factors
The tax rates under President Bill Clinton were higher than the tax rates under President George W. Bush, and yet statistics show the economy performed better under President Clinton. While this may be due to a variety of factors other than the tax rate, it illustrates the difficulty in making definitive statements about the effects of decreased tax rates on revenue. Economies do not operate in vacuums, and attempting to pinpoint one area that can increase or decrease revenue is difficult.
Closing Loopholes
Some evidence suggests lowering tax rates on extremely high tax brackets may lead to an increase in revenue. For example, under President Ronald Reagan, the highest earners in the United States paid 70 percent in taxes. When that rate fell to 50 percent, there was a substantial increase in economic growth. However, with the lowering of the tax rate, many tax shelters also were closed, making more money available for taxation.
