A tax cut is the process of lowering taxes. The short-term ramifications of a tax reduction are a decrease in government revenue and an increase in income for individuals whose tax rate has been lowered.Politicians have attempted to characterize their proposed tax credits as tax reductions in order to increase public support for them. In the long run, however, the reduction in government revenue might be offset depending on taxpayers’ reactions.Because the longer-term macroeconomic consequences of a tax cut are unpredictable in general, they are difficult to predict. Tax cuts may entice people and businesses to make additional investment in the economy by providing them with a financial incentive. Analysts have predicted that higher rates will result in more taxable income, resulting in greater revenue than was produced at the previous rate. However, tax increases may also result in tax evasion because people and businesses have a greater incentive to conceal their income or tax deductions when tax rates are higher. Tax increases have the opposite effect on tax revenues; tax increase can lead to less taxable income and reduced tax revenue collected by the government.
Tax cuts often go along with decreases in social spending that tax revenues are reduced.The concept of tax cuts can be hard to pin down in popular taxonomy. In the United States, tax cuts are commonly associated with efforts to cut tax rates that mean lower tax bills and more money left over for spending or saving than under existing tax law. However, many tax cuts (such as a tax holiday for gasoline tax) do not actually reduce tax liabilities, but rather are tax rebates (money returned), tax exclusions or tax deductions for certain people or businesses. Additionally, tax cuts that result in an increase of net public debt will result in a higher interest expense that offsets some of the tax cut and could lead to future tax increases.