Question

What is more effective at generating economic growth, a tax rebate or a decrease in the tax rate? Why?

Please be as specific as possible.

Answer 1

For a tax cut, the government does not have to borrow or to redistribute income. In this sense, a tax cut encourages consumers to spend the newly achieved disposable income. Note that those who work, save, and invest are affected by tax cut while tax rebates are provided to all whether they do work or not. This implies that tax rebates are more than able to inject money in the economy and increase demand and production. But every dollar of rebate provided is financed thorugh either increased future taxes or borrowing.

This implies that tax rebates merely redistribute wealth. In contrast, tax cuts are preferable because they do not transfer wealth so that economic growth is not unstable as it is in the case of rebates.