Why do income tax revenues increase when tax cuts are made?

Answer 1

This was the main arguement that Ronald Reagan made. It is called trickle down economics. If you cut tax rates it actually generates more economic activity and thus higher tax revenues. It works to a certain extent but at some level there are demishing returns to the theory.

Answer 2

Here is a simplied answer Production = ( labor X Capital)
lower the burden on either labor or capital and you get more production. More production = more jobs = more revenue.

Now to really supercharge this equation, adopt the Fair Tax Act that replaces all income taxes, payroll taxes and compliance costs with a single sales tax on new items. Prices end up the same when taxes and compliance costs are no longer embeded in the product. See FairTax.org for details

Answer 3

When tax cuts are made, economic activity increases: individuals have more money in their paychecks, companies pay less taxes and keep more of the money they make. As a result, spending increases by both companies, and individuals. So, more money is collected in sales taxes, as more things are purchased; companies have more money, so they expand operations: they hire more employees (who will be paying income taxes, and buying stuff and paying sales taxes).

It's counter-intuitive, perhaps, but in a capitalistic economy, allowing people to take home more money gives them more money to spend, which drives expansion in the business community, which leads to more hiring, and more individuals with money in their pockets to spend (AND pay income taxes)...

Answer 4

Think of it as "Less Is More" or something along those lines. Less tax means the poor working stiffs actually have some money to spend; and spend it they do. This creates more jobs and more economic activity and thusly more tax dollars due to activity generated. Republicans support this theory as a general rule. Democrats, on the other hand, think that the poor working stiffs who earn the money are too stupid to spend it wisely so it should be taxed by Washington; where they know much better how to spend it intelligently and wisely.

Answer 5

You cut taxes, you keep more business operating and therefore collect more taxes. Corporation will hire more people usinf the tax saving and these people will pay more taxes, thus revenues go up.

Answer 6

with any tax cut, more people have more money to spend, thereby increasing the work force. With an increased work force, you'll generate more taxes collected.