TAXES DISCOURAGE PRODUCTION

TAXES DISCOURAGE PRODUCTION
THERE IS A still further factor which makes it improbable that
the wealth created by government spending will fully compensate
for the wealth destroyed by the taxes imposed to pay for
that spending. It is not a simple question, as so often supposed,
of taking something out of the nation's right-hand pocket to put
into its left-hand pocket. The government spenders tell us, for
example, that if the national income is $1,500 billion then
federal taxes of $360 billion a year would mean that only 24
percent of the national income is being transferred from private
purposes to public purposes. This is to talk as if the country
were the same sort of unit of pooled resources as a huge corporation,
and as if all that were involved were a mere bookkeeping
transaction. The government spenders forget that they are
taking the money from A in order to pay it to B. Or rather, they
know this very well; but while they dilate upon all the benefits
of the process to B, and all the wonderful things he will have
which he would not have had if the money had not been
transferred to him, they forget the effects of the transaction on
A. B is seen; A is forgotten.
In our modern world there is never the same percentage of
income tax levied on everybody. The great burden of income
taxes is imposed on a minor percentage of the nation's income;
and these income taxes have to be supplemented by taxes of
other kinds. These taxes inevitably affect the actions and incentives
of those from whom they are taken. When a corporation
loses a hundred cents of every dollar it loses, and is permitted to
keep only fifty-two cents of every dollar it gains, and when it
cannot adequately offset its years of losses against its years of
gains, its policies are affected. It does not expand its operations,
or it expands only those attended with a minimum of risk.
People who recognize this situation are deterred from starting
new enterprises. Thus old employers do not give more employment,
or not as much more as they might have; and others
decide not to become employers at all. Improved machinery
and better-equipped factories come into existence much more
slowly than they otherwise would. The result in the long run is
that consumers are prevented from getting better and cheaper
products to the extent that they otherwise would, and that real
wages are held down, compared with what they might have
been.
There is a similar effect when personal incomes are taxed 50,
60 or 70 percent. People begin to ask themselves why they
should work six, eight or nine months of the entire year for the
government, and only six, four or three months for themselves
and their families. If they lose the whole dollar when they lose,
but can keep only a fraction of it when they win, they decide
that it is foolish to take risks with their capital. In addition, the
capital available for risk-taking itself shrinks enormously. It is
being taxed away before it can be accumulated. In brief, capital
to provide new private jobs is first prevented from coming into
existence, and the part that does come into existence is then
discouraged from starting new enterprises. The government
spenders create the very problem of unemployment that they
profess to solve.
A certain amount of taxes is of course indispensable to carry
on essential government functions. Reasonable taxes for this
purpose need not hurt production much. The kind of government
services then supplied in return, which among other
things safeguard production itself, more than compensate for
this. But the larger the percentage of the national income taken
by taxes the greater the deterrent to private production and
employment. When the total tax burden grows beyond a bearable
size, the problem of devising taxes that will not discourage
and disrupt production becomes insoluble.