There are two different mechanisms by which a tax cut is
supposed to be able to help revive an economy. First, there is the Keynesian,
demand-side mechanism. Second, there is the supply-side
mechanism.
According to Keynesians, a reduction in taxes
will increase aggregate demand. This will happen because people will have more money to
spend (because it was not taken in taxes). An increase in aggregate demand increases
GDP, all other things being equal.
Supply-siders believe
that tax cuts (especially for the rich and for businesses) increase supply. When taxes
are lowered, people are encouraged to work and invest more because they get to keep more
of their money. This increase in work and investment translates to an increase in
aggregate supply.
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