How Tax Cuts can revive the Economy Essay

Tax cuts have been employed in the governments fiscal policy especially during times of economic slowdown to bring round the prudence. When the economy is slumping, the peoples consumption power also slumps. The heart demand for goods and services in the market also falls. This creates a blow out of the water wave which hits industries same manufacturing, the housing sector and the service industry hard, leash to rising levels of unemployment (Toomey & Soloveichik 2009).At such a time, a cut in levyes becomes one of the mechanisms available for pumping some life into the economy. Tax cuts for economic revitalization target especially people in the lower and middle classes. When implemented, tax cuts increase the amount of disposable income, that is, income after taxation, in the pockets of these people. Disposable income is perhaps the most critical factor in consumption.The availability of more cash to spend in the pockets of the masses raises the kernel demand for goods and services, creating jobs in the mingled sector of the economy therefore increasing the Gross Domestic convergence (GDP) (Toomey & Soloveichik 2009), a key indicator of the state of the economy. A cut in taxes works like a raise in salary. Tax cuts put one over effect through the multiplier effect which can be outlined as the ratio of change between aggregate economic production (represented by the GDP) and a change in taxes since not all disposable income after a reduction in taxation rates in reality translates to direct consumption.The multiplier, obtained by multiplying the marginal propensity to consume with the expenditure multiplier, is use as an indicator to the change in fiscal policy bring forth government taxes required to result to a desired level of aggregate output. If coupled with increased government expenditure on services like health and education (which could actually be termed as an integral bankrupt of the cuts or economic stimulus package), tax cuts ca n revive the economy (Toomey & Soloveichik 2009).