{"id":40609,"date":"2021-06-19T08:00:00","date_gmt":"2021-06-19T12:00:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=40609"},"modified":"2021-07-02T16:02:06","modified_gmt":"2021-07-02T20:02:06","slug":"effect-of-taxation","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/effect-of-taxation\/","title":{"rendered":"The Effects of Taxation on National Production"},"content":{"rendered":"\n

What is the role of taxation in an economy? Under what circumstances does raising taxes hinder the economy on the national level?<\/p>\n\n\n\n

Some tax-funded projects are essential to keep the country running. But when the government uses taxes to fund projects and pay wages that are unnecessary, the consequences begin to outweigh the benefits. <\/p>\n\n\n\n

In this article, we’ll consider the effect of taxation in the context of public works funding.<\/p>\n\n\n\n\n\n\n\n

Public Works Projects Hurt National Production<\/strong><\/h2>\n\n\n\n

Raising taxation to fund public projects is considered good for the economy. However, the effect of taxation is not as benevolent as you may think.<\/p>\n\n\n\n

Public works projects divert resources and manpower that would have otherwise supported jobs in private industries.<\/p>\n\n\n\n

People tend to be shortsighted and overly optimistic about public works projects. Many people see the benefits of public works projects\u2014including job creation and construction of useful structures, like roads and bridges\u2014but they fail to see the invisible costs. Government spending<\/a> is paid through taxes, meaning that public works projects come at the cost of the goods and services that individuals would have spent with the money they paid in taxes. <\/strong><\/p>\n\n\n\n

People generally make two arguments in defense of public works projects, such as building a $100 million bridge: <\/p>\n\n\n\n

  1. The projects create employment. <\/strong>Although it\u2019s true that one group of people gets jobs working on the bridge, the full picture reveals that the $100 million cost to taxpayers prevents individual spending that could have created private jobs. The public jobs created are offset by the private jobs that were destroyed or that never had the opportunity to exist.<\/li>
  2. The projects create structures that benefit the community.<\/strong> While it may be beneficial to have a particular bridge or dam, there\u2019s no way of knowing the countless goods and structures that could have been created if the taxpayers had been able to keep their collective $100 million. Naturally, many public works projects are necessary to maintain essential public roads and services. However, when projects are undertaken for the primary purpose of creating jobs<\/a> and stimulating the economy, the costs must be weighed against the benefits.<\/li><\/ol>\n\n\n\n

    People overestimate the positive effects <\/em>of public works projects because they\u2019re visible: You can see the people working on a bridge, you can see the construction progress week after week, and you can drive over the finished bridge. On the other hand, people overlook the costs <\/em>of public works projects because they\u2019re invisible\u2014you can\u2019t see the jobs and possibilities that were lost because of the taxes, manpower, and other resources that were diverted to the public works project. Additionally, when the primary goal of a project is job creation, the work will inevitably be inefficient, because projects that are unending and inefficient are more successful at creating and maintaining jobs<\/strong> than projects that are finished quickly with a lean crew.<\/p>\n\n\n\n

    Taxes Hamper Private Industry <\/strong><\/h3>\n\n\n\n

    Fallacy:<\/strong> Tax-funded projects create jobs and build wealth<\/a>.<\/p>\n\n\n\n

    Reality:<\/strong> Tax-funded projects inhibit private job creation and productivity by taking money out of taxpayers\u2019 hands.<\/p>\n\n\n\n

    As we discussed regarding public works projects, taxes on individual and corporate earnings take money out of people\u2019s pockets, which inhibits the creation of private jobs and wealth.<\/strong> Of course, some taxes are necessary for basic government services. However, the danger arises when taxes are viewed as a consequence-free source of funding for job-creation and wealth-building efforts.<\/p>\n\n\n\n

    Taxes create an imbalance between dollars spent and dollars earned. When corporations or individuals earn <\/em>a dollar, they may only keep 50 cents, with the rest going to taxes. On the other hand, when they spend<\/em> a dollar, they lose the entire 100 cents. They have to earn significantly more than they lose in order to offset the taxes. <\/p>\n\n\n\n

    For manufacturing, high taxes prevent companies from expanding, and, if they do expand, they do so with minimal risk. <\/strong>Manufacturers\u2019 reluctance to expand and take on risk slows the adoption of updated, more efficient machinery, which means that the products they sell aren\u2019t as high-quality or affordable as they otherwise could be. Additionally, the high price of doing business deters entrepreneurs from starting new companies. As a result, compared to the potential if companies shouldered lower taxes, taxes inhibit growth among new and old businesses, which leads to:<\/p>\n\n\n\n