Home » Quick guides » Economics In One Lesson » V/ Taxes Discourage Production

It is improbable that the wealth created by government spending will compensate for the wealth destroyed by raising taxes to pay for it. What is at work is not mere book keeping.

Tax is not a simple question of taking something out of the nation’s right pocket to put into its left pocket. Government spenders neglect the effects on those taxed just as they may celebrate the immediate effects on those who receive government spending.

Taxes inevitably affect the actions and incentives of those taxed. If a corporation makes a loss of a pound, then they lose the whole pound, but when they succeed, they only retain a fraction of their gains. The balance between risk and reward is distorted by taxation, altering investment decisions.

Capital available for investment diminishes: it is taxed away and it can only be accumulated more slowly. New productive jobs are never created. People do not receive better and cheaper products. Real wages are held down. Progress is inhibited.

If personal incomes are taxed at 50% or more, workers will question why they should work six or more months for the government and 6 months or less for their family. They work less, produce less and save less. Less capital is accumulated with which new productive jobs can be created.

Ultimately, government spenders make unemployment worse despite their claims of solving it.

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