One area of disagreement among economists is the impact that income tax cuts will have on a budget deficit. Explain in detail the reasoning of both sides of this argument

Answer 1

A budget deficit occurs when government spending exceeds tax revenues. Some economists argue that income tax cuts will lead to a smaller deficit. Their reasoning is that if income taxes are cut, individuals will choose to work more and produce more. As a result, the tax base will rise because people are earning more income. As long as the percentage increase in the tax base is greater than the percentage decrease in the tax rate, tax revenues will rise. This will result in a smaller budget deficit. Those who disagree with this logic find it unlikely that the tax base will rise sufficiently enough to raise tax revenues, and thus they believe that a tax cut will make the budget deficit grow.