Tax cut

The immediate effects of a tax cut are, generally, a decrease in the real income of the government and an increase in the real income of those whose tax rate has been lowered. In the longer term, however, the effect on government income may be reversed, depending on the response that tax-payers make. 

Depending on the original tax rate, tax cuts may provide individuals and corporations with an incentive for investments which stimulate so much economic activity that even at the lower rate more net tax revenue will be collected. Government cuts its expenditure spending the money on commodities sourced from within the country.

This combination is macro economically neutral, but advocates of a free-market economy argue that it improves economic welfare, since people are more accurate than the government in spending money on commodities that they actually want bringing about greater general prosperity.

Government maintains its expenditure and taxpayers increase theirs, spending the money on commodities sourced from within the country. This combination provides a stimulus to the economy, and it is on these grounds that advocates of supply-side economics frequently argue for tax cuts.