Answer: Low taxes are better because primarily through their impact on demand. Tax cuts boost demand by increasing disposable income and by encouraging businesses to hire and invest more. Tax increases do the reverse. These demand effects can be substantial when the economy is weak but smaller when it is operating near capacity. The higher the tax rate, the more time people spend evading taxes and the less time they spend on the more productive activity. So the lower the tax rate, the higher the value of all the goods and services produced. Government tax revenue does not necessarily increase as the tax rate increases. So that’s why low taxes will not cause the economic boom.
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