how do taxes affect economic growth 
taxes affect economic growth at least in the short term through their impact on demand a tax cut increases demand by raising personal disposable income and encouraging businesses to hire and invest however the size of the effect is dependent on the strength of the economy if it is operating close to capacity the effect is likely to be small if it is operating significantly below its potential the impact will be more pronounced the congressional budget office cbo estimates that the effect is three times larger in the latter case than in the former 6the cbo also found that tax cuts are generally not as effective in stimulating economic growth as government spending increases that is because most of the spending boosts demand while tax cuts boost savings as well as demand one way to mitigate this effect is to target tax cuts to lower and middle income households which are less likely to put the money into savings 6