Tax Cuts

A tax cut is one of the tools of expansionary fiscal policy and it is meant to stimulate the economy during the period of recession or a business-cycle contraction by changing aggregate expenditures and shifting the aggregate demand curve with a rightward shift of the aggregate demand curve.
      The graph above shows how due to expansionary policy of tax cut and refunds will shift the AD curve to AD’ and the new long run equilibrium is reached with the intersection of AD’, SRAS and LRAS at higher level of price and real GDP. This shift in aggregate demand is due to the increase of money in the hands of public and businessman which may use it has consumption spending and investment spending to increase the aggregate demand and real GDP.
      But actually after going through several articles written on and discussed about the tax cut I found that the tax cut of bush administration has mix effect compare to the result which is generally expected and written in theories of economics. somewhere it is said that the tax cut which is very obvious increased the federal budget and has failed to boost the business investment, increase in jobs, wages etc. some authors argue that based on the idea of Laffer curve, the tax rate cut has increased government revenue and rich has paid more tax in dollars when tax rate is cut.
      In one of his article Mr. John Irons (Director of Tax and Budget Policy at the Center for American Progress) argued that tax cut policy is a failure, he says that this policy was only meant for rich and wealthy businessman and not for the common average consumers. It is said that business investment has grown very slowly during bush period since last 60 years. According to him if the policy is targeted towards increasing the income of common consumers whose increased demand and consumption for products would have increased the business investment.
      With the help of above discussion I can say that tax cut on economic activity will...