Economy is the source of tax revenue andthe taxation affect on the economy. Theoretically, without the consideration ofthe usage of taxation, the impact of taxation on economic growth must benegative. Negative correlation between macro tax burden and economic growth hassome restraining effect on economic growth and investment (Gemmell et al 2006).
However, if considering the use of tax revenue since tax revenue will promoteeconomic growth, the impact of tax on economic growth is two-way, which is thegeneral principle of the relationship between tax revenue and economic growth.The tax effect theory shows that through taxation, the government can influencethe taxpayers’ consumption, saving and investment behaviour and make them makea rational choice that maximizes their own utility, thereby affecting theallocation of resources (Widmalm, 2001). The macroscopic tax burden theory, thetax elasticity theory and the balanced budget theory help to elucidate thetheoretical relationship between tax revenue growth and economic growth. One hottest issue concerned by policymakers and business players is the tax reform act of the United States. Underthe tax reform act, the federal corporate income tax rate in the United Stateswill be reduced from 35% now to 21%.
And, the one-time tax on retained profitsof U.S. companies is retained, of which the tax rate on cash profits is 15.5%(Ted, 2017). This new act applies the “territorial” tax principle, whichmeans that American companies’ overseas profits will only need to be taxed inprofits-producing countries without paying taxes to the U.
S. government in thefuture (Ted, 2017). In order to encourage enterprises to invest for a longtime, the content of corporate income tax reform is permanent.
In terms ofpersonal income tax, the current federal personal income tax rate remainsunchanged at 7th, but most of the tax rates have declined. The maximum tax ratehas dropped from the current 39.6% to 37% (Ted, 2017). In addition, thepersonal income tax credit will be doubled, but the tax credit such as localand state taxes is capped. However, personal income tax changes valid until theend of 2025 (Ted, 2017). As claimed by the president Trump, this new act willbring new job opportunities and investment and make the country great again.
The high level of public concern for this act indicates the changing global environmentfor taxation for recent years in order to deal with increasing economicchallenges and intense global competition. However, in order to have a deeper understandingof this act, there is a need for obtaining a good knowledge of the impact oftax on economic growth and this is the rationale for choosing this topic inthis research.