Though sales taxes are a substantial source of revenue for government, sales tax cut can eventually help economy to grow. For long run economic growth, Goods and Service Tax (GST) reduction will be more beneficial than income tax reduction. If GST is cut, it will encourage the firms to invest more in production activity. Entrepreneurs will be motivated to assume business enterprises as GST cut lessens production cost. If production cost decreases and output price remains the same, it ensures more profit for businesses. Thus, as a result of GST cut, production level will rise and aggregate supply will increase to a large extent.
Increase in aggregate supply meets country’s needs and at the same time a country can earn a great deal of foreign exchange by exporting the additional products to other countries. So, it is clear that the reduction in GST helps to improve a country’s economy. As GST cut lessens production cost and raises profit for a business, the firms need more workers to maintain the increased production level. As a result, firms will hire more people. It will decrease the unemployment rate of the country. On the other hand, people will be able to spend more if they are employed.
When people spend more, it increases the aggregate demand. The increase in aggregate demand brings about economic growth as households purchase the economy’s expanding output of goods and services. As GST cut reduces per unit production cost, firms will be able to pay better salaries to their workers. Salary increase will encourage workers to work hard and it will increase productivity. When productivity increases, GDP rises. Moreover, when firms will earn more profit as a result of GST cut, they will be encouraged to invest more money to improve the process of production.
They will invest on innovative production techniques and on technological advancement. Technological advancement will contribute to productivity growth. Other things equal, stronger productivity growth allows the economy to achieve a higher rate of economic growth. On the contrary, income tax cut decreases the real income of government. So, the more government cuts taxes, the less money it has to spend. So, government will not be able to spend sufficient amount of money on education and health care. A healthy workforce is a productive workforce.
If government fails to provide better health care because of lack of fund, it will affect people’s productivity. The same situation happens with education sector. People with more education are generally more productive than people with less education. If government cannot spend enough money on education, there will be lack of efficient workers and it will affect country’s economy. Moreover, a country needs proper infrastructure for high level of economic activity. Therefore, government needs to spend money for the infrastructure to ensure economic growth.
But, if government experience lack of fund because of income tax reduction, there will not be enough spending on infrastructure and it will hamper economic growth. In conclusion, it can be said that GST cut is more beneficial to the country’s economy if either of the cuts (GST cut or income tax cut) result in the same decrease in revenues for the government. GST cut helps economy by reducing production cost, by creating more jobs and by increasing productivity and aggregate supply. Therefore, government should cut the GST for the long run economic growth of the country.