An income tax is a tax imposed on individuals or entities that varies with respective income or profits. Income tax generally is computed as the product of a tax rate times taxable income.
This article is my personal opinion therefore welcomes any argument, as to how the reduction in Income Tax is good for the economy both in short and long run.
Initially, let's see how a basic implication of increasing Income tax work.
Taxes rises - Disposal income falls - Demand falls - Production falls - GDP falls - Growth falls.
This shows as how the increase in Income Tax can hinder the GDP growth.
Now, the inverse situation I will be explaining with 3-4 flow diagrams.
Firstly, we all agree that the reduction in Income Tax will induce people to either work more or have more of a leisure time.
It is clearly evident that in case working hours increases the income generation of the workers increases causing an uprise in both demand and supply, thereby increasing the overall growth.
Now onto the second case, if there is a reduction in Income Tax, working hours of a worker falls. The time left with him is leisure time and he would be investing in something he loves to do thereby rejuvenating the mind and increasing efficiency of labours. This will enhance the productivity causing a spurt in GDP growth.
In the third diagram, I will be reversing the implication of increase in TAX but how exactly disposal income generation helps from supply side. See, the increase in disposal income will increase the savings with which people will invest either in mutual fund or real estate or anywhere it will automatically goes to the suppliers and productivity rises causing a rise in GDP.
Most of you will argue that decrease in government revenue will increase the budget deficits. The government will have to stick to borrowing either domestically or globally which will reduce the private investment and foreign investment respectively. And because of this future productivity is hindered and employment level.
I say this effect is neutralised. How?
Reduction in taxes will infuse more workforce in the economy the taxpayer population increases and the revenue generation rises.
Moreover, I agree with the model experienced under USA's President Regan reign popularly came to be known as Reganonomics or Trickle down effect.
He reduced the taxes specifically on upper class which increased their spending thereby increasing investment, generating employment
In a nutshell rising the standard of economy. But he faced an immediate drawback which was inflation that got soon under control.
My apparent knowledge has led me to these flows only but that doesn't mean they are right therefore I will be open for any sort of arguments pertaining to this matter.
