Question

Is charging people a lower tax rate on the income they earn from saving a good way to improve growth?

Answer 1

Almost all the economist believes that lower tax rate on the income they earn from saving a good way to improve growth. Economists, who are of the view that low tax rates are better, ignore the real life perspective. It is a myth that lower tax rate will give the general people more income after tax that could be used to buy more goods and services. This argument is based on the demand side which supports lowering tax as an expansionary fiscal stimulus.

Lower tax reduces government revenues in the short run; it also creates a budget deficit and increases debts. The result is that it leads to lower spending. The argument is that lower income groups would spend the after tax income while higher income families will save their tax deducted income.

Supply side economists argue that tax lowering rates increases economic growth. It provides a boost to an economy but only in the short run. The deduction must be balanced with the deduction in spending to avoid increases in federal debt. It ignored the federal debt would eventually slow the pace of the economy.