Economics in One Lesson

C
HAPTER
5
Taxes Discourage Production
T
here 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 $200,000,000,000 (they are always generous in fixing this figure) then
government taxes of $50,000,000,000 a year would mean that only 25
percent of the national income was being transferred from private pur-
poses 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 govern-
ment 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
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taxes inevitably affect the actions and incentives of those from whom
they are taken. When a corporation loses 100 cents of every dollar it
loses, and is permitted to keep only 60 cents of every dollar it gains,
and when it cannot offset its years of losses against its years of gains,
or cannot do so adequately, its policies are affected. It does not
expand its operations, or it expands only those attended with a min-
imum 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 bet-
ter-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, and that real
wages are held down.
There is a similar effect when personal incomes are taxed 50, 60,
75, and 90 percent. People begin to ask themselves why they should
work six, eight, or ten months of the entire year for the government,
and only six, four, or two months for themselves and their families. If
they lose the whole dollar when they lose, but can keep only a dime 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 com-
ing 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 produc-
tion itself, more than compensate for this. But the larger the percent-
age 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 dis-
courage and disrupt production becomes insoluble.
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