Does the economy affect dating
The first effect normally raises economic activity (through so-called substitution effects), while the second effect normally reduces it (through so-called income effects).
The financing of tax cuts significantly affects its impact on long-term growth.
Tax cuts financed by immediate cuts in unproductive government spending could raise output, but tax cuts financed by reductions in government investment could reduce output.
While rate cuts would raise the after-tax return to working, saving, and investing, they would also raise the after-tax income people receive from their current level of activities, which lessens their need to work, save, and invest.
Given the various channels through which tax policy affects growth, a tax change will be more growth-inducing to the extent that it involves (i) large positive incentive (substitution) effects that encourage work, saving, and investment; (ii) small or negative income effects, including a careful targeting of tax cuts toward new economic activity, rather than providing windfall gains for previous activities; (iii) reductions in distortions across economic sectors and across different types of income and consumption; and (iv) minimal increases in, or reductions in, the budget deficit.
The remainder of the paper is organized as follows.
Section II provides a conceptual framework by discussing the channels through which tax changes can affect economic performance, including the many ways in which a positive substitution effect in response to a tax rate cut might be dissipated or even reversed by other factors. We show that growth rates over long periods of time in the United States have not changed in tandem with the massive changes in the structure and revenue yield of the tax system that have occurred.
We also report findings from Piketty, Saez and Stantcheva (2014) that, across advanced countries, even large changes in the top marginal income tax rate over time do not appear to be strongly correlated with rates of growth.