Discuss the Extent to Which a Cut in Income Tax Will Be Effective in Promoting Economic Growth

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Income tax is the tax levied on personal income and the rate at which it is applied is one of the main ways in which the government can affluence aggregate demand. Changes in income tax affect the incentive to work. Tax rises have the effect of the reducing the post-tax income of those in work because for each of work taken the net income is now lower. This may mean people will work for longer to reach a target income but equally it may mean people see work as a waste of time considering they would have to work for longer hours. Furthermore, it also mentioned in the theory of Arthur Laffer that any hike in taxes would lead to an increase in revenue in the short term but it would be offset by decreased tax returns in the long term. It also worth mentioning that tax evasion could become a problem with high income tax rates. Examples of tax evasion schemes involve people investing in businesses that make a loss, taking advantage of the tax breaks involved. Overall, income tax rates that create an incentive to work are likely to increase productivity and help an economy grow. Income tax changes affect aggregate demand in various ways. If people had higher disposable income as a result of low income tax rates aggregate demand would increase. When aggregate demand increases firms would have to invest to meet it and this in turn leads to an increase tax revenues. This suggests that low income tax rates are important because they allow for wealth to be created. With increased wealth an economy is more likely to grow because consumer expenditure will increase a large component of aggregate demand. Income tax cuts would also lead to more entrepreneurs and highly skilled workers joining to the country, also increasing aggregate
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