impact of cutting tax rates to influence growth (2)

Question 1

KAA1+2 -> impact of cutting tax rates to influence growth (ACTUAL AND POTENTIAL ECO. GROWTH)

Answer 1

INCOME TAX
- more disposable income -> more consumer spending -> 60% of AD in UK -> more real GDP -> +ve multiplier effect
CORPORATE TAX
- more retained profits -> more investment -> injection into circular flow -> 15% of AD in UK -> more real GDP -> +ve multiplier effect -> chain = actual eco. growth + reduced unemployment

POTENTIAL ECO. GROWTH
- lower rates would attract FDI + high-income earners from other countries -> increased productivity + efficiency (knowledge transfer + building physical capital) -> incr LRAS -> real GDP up -> potential eco. growth

Question 2

EVAL (impact of cutting tax rates to influence growth)

Answer 2

WORSENED FISCAL DEFICIT/NATIONAL DEBT
- less tax revenue (depends where on Laffer Curve) -> worsened fiscal deficit in UK -> may lead to crowding out as gov. increases borrowing to fund public expenditure -> higher interest rates -> disincentivises investment -> offsets benefits
- depends on consumer + business confidence e.g. due to COVID -> may not spend or invest