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A reduction in the investment tax credit, or an increase in corporate income tax rates, will reduce investment and shift the aggregate demand curve to the left. Real GDP and the price level will fall.
Lowering taxes raises disposable income, allowing the consumer to spend more, which increases the gross domestic product (GDP). Supply-side tax cuts are aimed to stimulate capital formation.
If the government raises the income tax rate, people pay a higher portion of their income in taxeswhich means they have less income to buy goods and services. If the government cuts the income tax, or takes a smaller portion of peoples income, people have more money to spend on goods and services.
How do taxes affect the economy in the long run? Primarily through the supply side. High marginal tax rates can discourage work, saving, investment, and innovation, while specific tax preferences can affect the allocation of economic resources. But tax cuts can also slow long-run economic growth by increasing deficits.
Taxing the Rich Could Raise Trillions But That Alone Wont Fix Our Fiscal Crisis. Because of the structural mismatch between federal spending and revenues, the budget deficit from fiscal year 2023 was $1.7 trillion, or 6.3 percent of gross domestic product (GDP).

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Combining empirical methods, Karel Mertens and Morten Ravn found that a one percent cut in the personal income tax rate boosts real GDP per capita by up to 1.8 percent. That translates to a multiplier similar to those described above of about 2.5.
Increasing taxes, which reduce an individuals spending power, can help ease inflation. As the St. Louis Fed notes, through taxation, the government can have some influence over the total level of spending by consumers.
If innovation, like many other economic outcomes, is the result of intentional effort and investment, then higher taxes will reduce the expected net return to these inputs and lead to less innovation.

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