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Could we create a tax that automatically toggles on or off depending on the state of the economy taking into consideration that the revenues would be saved for further use, either to stimulate the economy when it’s bad, or if it becomes too big, use some of the money to reduce the debt?
This tax could be used instead of raising interest rates or at the same time. Furthermore it could be used to target a certain sector.
It is very difficult to say what the state of the economy is at at a given point in time so it is difficult to create conditions that would serve as an on/off switch for a certain tax.
There are what are called "automatic stabilisers", however, which act in a way similar to what you described.
The marginal income tax is actually an example of an automatic stabiliser. If the economy is doing well as measured by an increase in nominal wages, the proportion of an individuals income that goes to paying off tax will be increased, which slows down economic growth.
On the other side of this, there are welfare payments which function as automatic stabilisers when the economy is not doing so well. People with low income tend to spend a greater proportion of their income than those who have a higher income, so when the economy is doing poorly and unemployment rises, more people get welfare and they spend a large amount of their welfare payments, stimulating the economy.
Depending on who you ask, it may be a bad idea to tax specific sectors as that will distort the market.
Further, it might prove dangerous to spring taxes on people and businesses if the economy is "too good", this could disrupt planning by businesses as their plans may be dependent on a given rate of tax.
Could we create a tax that automatically toggles on or off depending on the state of the economy taking into consideration that the revenues would be saved for further use, either to stimulate the economy when it’s bad, or if it becomes too big, use some of the money to reduce the debt?
It is trivially true that such tax can be created by government. Government only needs to specify thresholds for values of GDP or unemployment or other parameters at which tax triggers or turns off.
The only problem here is that most macroeconomic data are reported with a quarter or half year lag.
Would it work?
Depends, how you define "work". Such tax would almost certainly create large distortions. You do not specify what type of tax we are talking about. For example some random dividend income tax triggers during expansion, corporations would just postpone paying dividends until recession. If we talk about VAT people would likewise postpone some purchases.
This kind of behavior is both creating deadweight loss to the economy and eroding the tax base for such tax. Hence such tax will create relatively large distortions whereas rising little revenue.
Lastly lets circle back to the point:
revenues would be saved for further use, either to stimulate the economy when it’s bad, or if it becomes too big, use some of the money to reduce the debt
Nothing prevents government from using revenues from regular taxes in this way. You don't need to invent new esoteric modes of taxation. Government can consolidate taxes just by rising regular taxes or curbing spending. If government does not have enough political will to do it with regular taxes then this won't help.
