While traditional theory would insist that taxes be increased in order to balance the increases in government spending referred to above, Keynesian theory argues that tax increases would only depress spending by consumers and businesses, worsening the recession.
Thus, taxes should not be increased during a recession; indeed, if anything, they should be reduced, so as to help raise the level of aggregate demand. The most popular policy of this type is the personal income tax cut, intended to increase personal disposable income and consumer spending, although temporary sales tax cuts have also been used for this purpose. To promote higher levels of business investment spending, various types of tax reductions may be used, including cuts in corporate income (profits) taxes and increased capital cost allowances, which permit businesses to depreciate assets more quickly, thus reducing their taxable income an
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