Suppose Political Party A proposes a tax cut on business income to stimulate the economy. Political Party B opposes the tax cut on business income asserting that it would only help businesses, not the average working man and woman

Question

If you were hired as an economist for Political Party A, explain how the tax cut on business income would help the average working man and woman.

Answer 1

The multiplier effect would spread the effect of the tax cut in business income across average working men and women. First, the business income tax cut would increase the after-tax expected profitability of capital investment, leading businesses to purchase more capital goods, like factories, computers, and machine tools. These capital goods are produced by businesses that employ average working men and women. Second, the increase in income to the owners and workers of the businesses that produce the capital goods would lead to additional spending across many other businesses, increasing the income of these owners and workers. Their increase in income would lead to still more spending and the multiplier effect would spread across businesses and average working men and women.