Tax cuts are a hot topic. The impact of a tax cuts is not fully understood, which has lead to a number of questions. What will it do for the economy? How will the tax cut effect individuals? How will the tax cut effect businesses? Will it encourage people to spend more? What type of tax cut is it?
What is a tax cut?
A tax cut is a change in tax law that will reduce the amount of taxes paid to the government. The tax cut will reduce an individual’s taxes, a business’ taxes or a combination of both.
What are some of the different kinds of tax cuts?
Income tax cuts – Reduces the amount of taxes individual’s pay
Capital gains tax cuts – Reduces the taxes on the sale of assets, such as stocks and business property
Business tax cuts – Reduces the taxes on business profits
Short-term versus long-term tax cuts
Tax cuts can be short-term or long-term. A short-term tax cut will expire at the end of the year. An example of a short-term tax cut is a one-time rebate. A one-time rebate is a government check sent to an individual or a family for the taxes that they have already paid.
A long-term tax cut will affect the current year and future years. Examples of long-term tax cuts are reduction of tax rates and establishing a new tax credit.
Are tax cuts good?
The argument for tax cuts is that it will create economic growth by putting money back into the hands of people who buy goods and services. This would then grow investments and lead to higher incomes, more jobs, and economic growth. After the Ronald Reagan tax cuts, in the early 1980’s, there was amazing economic growth. However, there is not sufficient evidence supporting this cause-and-effect relationship. Other tax cuts have not caused economic growth.
How will a tax cut effect you?
There will be less taxes on your income for individual tax cuts. Therefore, a little more money goes into your pocket each paycheck. Will you spend more money on goods or services? Rather, will you save the money? Is this an opportunity to work harder and ask for raise? Alternatively, would you work less because you do not have to work as hard to make the same amount of money? Maybe you feel like the tax cut is too small to help financially.
Tax cuts will affect everyone differently. Some tax cuts have caused a growth in the economy while others have not. Therefore, the outcome could be very different every time a tax cut happens.