History

• Taxation, at its core, is an inefficient economic practice. Taxes raise the cost of conducting economic activity. For instance, sales tax might increase the cost of designer clothing by 6 percent, which would reduce the number of consumers willing to purchase clothes. That, in turn, could force the clothing producer to demand less inventory, which would lower orders placed with clothing manufacturers. The ultimate effect of taxation is a decrease in output, and economic output (GDP) is the main measure of economic health.
  
  

Function

• The purpose of a tax cut, tax rebate or any other kind of tax break is to put more money in the hands of the individuals in the economy. When people have little or no extra money to spend, it is difficult to create economic growth, since people do not have the means to launch new ventures, make investments and consume goods and services. Lower taxes give people more money to spend, and more expenditure leads to economic growth.
  
  

Benefits

• Reduced taxes can increase consumer spending and stimulate job creation. For instance, if taxes were cut on small businesses, they would be more willing and able to hire new employees, and having more people at work would increase economic output. Taxation also provides a disincentive to work. For instance, if you had to pay 80 percent of your income in taxes, you would have much less incentive to work than if you only paid 10 percent. The more money individuals can keep, the harder they will be willing to work.
  
  

Drawbacks

• While lowering taxes can potentially stimulate economic growth, the government needs tax revenue to operate, and some of its programs may be more efficient at providing value to society than the private sector. For instance, people need good roads to get to work and to send and receive goods, but without tax revenue states would not be able to maintain roads.
  
  

Considerations

• While lowering taxes can stimulate economic growth, tax cuts may not necessarily stimulate growth in all circumstances. If an economy is shrinking, a tax cut may simply slow the rate at which the economy shrinks rather than creating growth. On the other hand, lowering taxes could potentially harm economic activity. For instance, if the government decided to reduce taxes by cutting funding for public schools, it could decrease the ability of new workers to contribute to the economy, thereby hampering growth.