Are High Taxes Good for the Economy?

Advocates of high taxes are often heard saying that taxes strengthen the nation by funding essential public utilities (like highways and elementary schooling) that benefit citizens and facilitate businesses. On the other hand, free market thinkers have long maintained that money is best used (spent, saved or invested) when it is left in the hands of the people; and this fosters economic growth and creates job opportunity. Let’s have a look at which of these two arguments hold.

Who Should Have the Right?

Should money belong to the people who earn it? Should people who earn the money have the right to decide how it is used? This is the most fundamental question. Wealth doesn’t get generated out of thin air. It is the result of individuals making right career choices or companies taking the right business decisions. It is the result of deploying limited resources in the most efficient way, whether this is time, machinery or raw materials. So, shouldn’t people who are productive and generate money have a right to keep it? The most logical answer to this is “YES”.

Looking at the other side of the coin, the government does require some funds to function. People may agree to forsake a portion of their hard-earned money so that the country can have a strong national defense and system of justice. This, however, does not justify high taxes. And, the government certainly cannot claim our money to use it as it pleases, with little accountability.

Money Needs to be Spent Efficiently

Why does the government need to build highways, generate electricity or produce goods? These are best left to private businesses, since they make more efficient use of money and resources than governments do. Businesses are more careful with money because funds come at a cost. Even when an entrepreneur invests his own money into a business, he foregoes the interest the money could have earned if it was invested elsewhere. Conversely, the government is not concerned with such matters. It is not their money being spent and there’s no thought to the opportunity cost of those funds.

What Would You Like to Encourage?

High taxes penalize hard work and stunt job growth. The more an individual earns, the higher is the tax bracket. Also, taxes make businesses less profitable. Some cannot bear the high tax burden, become loss making and shut shop. This results in people losing their jobs. The businesses which do not shut down have less money to invest in growth. With more funds, these businesses may have thrived, and created far more job opportunities.

Lower taxes would not only strengthen businesses and the economy, this would also increase the base of taxpayers.

Why High Taxes?

Governments have high taxes to hide their own inefficiencies and not to strengthen the economy. What would really strengthen the economy are smaller governments and higher accountability. A high-tax regime is a myopic approach as it discourages hard work and dampens investments. It encourages tax avoidance and evasion, and, at the same time, increases the need for funds to ensure better tax collections. That’s the biggest irony of a high-tax regime!