Tax cut

A tax cut (or tax rate cut) is typically seen as leading to a decrease in the amount of money taken from taxpayers, thus increasing the disposable income of taxpayers but decreasing government revenue. It usually refers to reductions in the percentage of tax paid on income, goods and services. Tax cuts also include reduction in tax in other ways, such as tax credits, deductions, and loopholes. As they leave consumers with more disposable income, tax cuts are an example of an expansionary fiscal policy.

How a tax cut affects the economy depends on which tax is cut. Policies that increase disposable income for lower- and middle-income households are more likely to increase overall consumption and "hence stimulate the economy". Tax cuts in isolation boost the economy because they increase government borrowing. However, they are often accompanied by spending cuts or changes in monetary policy that can offset their stimulative effects.

Sometimes a tax cut can increase tax revenue, as economist Thomas Sowell explains:

"What actually followed the cuts in tax rates in the 1920s were rising output, rising employment to produce that output, rising incomes as a result and rising tax revenues for the government because of the rising incomes, even though the tax rates had been lowered."