New Delhi, Sept. 23 -- Tax cuts are to fiscal policy what rate cuts are to monetary policy-both are tools to stimulate economic growth. This has been a bumper year for tax cuts: in February the Union Budget raised the exemption limit for income tax, and in August GST rates were cut across a swathe of goods and services. The former was pitched as a reward for the hardworking middle class and the latter as a structural reform, but both measures were aimed at stimulating growth through increased consumption.

Tax cuts contribute to growth through two channels. The income effect boosts consumption and investment by unlocking income. A cut in income tax payable directly increases disposable income; a drop in GST does the same by reducing the c...