Evaluate the likely impact of cutting tax rates as a policy to increase economic growth

In 2018, the United States Government cut the corporation tax rate (tax on company profits) from 35% to 21%. Income tax rates for US citizens were also reduced: for example, the top rate of income tax was cut from 39.6% to 37%. Evaluate the likely impact of cutting tax rates as a policy to increase economic growth. (June 2020)

Plan

• Paragraph 1
  • Argument: one impact of a decrease in tax rates is an increase in economic growth through an increase in AD
  • Diagram: right shift in AD, multiplier effect
  • Evaluation: question the size of the multiplier effect, 1/(1-MPC)
• Paragraph 2
  • Argument: another impact of a decrease in tax rates is an increase in the trend rate of growth
  • Diagram: right shift in LRAS
  • Evaluation: question the opportunity cost and time lag

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