Explain the advantages and disadvantages of both a Supply-side tax cut and a Demand-side tax cut....

Explain the advantages and disadvantages of both a Supply-side tax cut and a Demand-side tax cut. Why is the former so popular with the GOP? And why is the latter almost unheard of in the 21st century?

Solutions

Expert Solution

Supply-side tax cuts are those tax cuts that are aimed at prodding the supply side of the economy in order to spur supply.

Recent coroprates tax cuts can be said to be an example of supply-side tax cut. The corporate tax cuts were aimed at enabling the companies to have more funds at their disposal to invest and expand more which would lead to higher employment in trhe economy.

Advantages-

( I ) Most importantly supply-side tax cuts don't result in inflation.

( II ) Creates higher employment by incentivising higher investment by the firms.

Disadvantages-

( I ) During recessions supply- side tax cuts do not work.

Demand-side tax

Demand - side tax cuts are aimed at promoting increased spending by consumers. Such tax cuts are aimed at increasing income in hands of people or consumers. The tax cuts announced in 2008 is an example of demand-side tax cut.

Advantages:-

( I ) Demand-side tax cuts are especially useful during recessionary periods.

( II ) Increased welfare of consumers.

( III ) More favoured by people in general.

Disadvantages:-

( I ) Such measures are generally inflationary and may result in high inflation.

Rahul Sunny answered 1 year ago

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