Taxes are a necessary thing in the existence of a society that strives to be a community of individuals, working towards the common goal of an increased standard of living, through an increase in economic production. In this effort to increase the standard of living, there are some things that are the responsibility of the collective and not of individuals. These responsibilities include things like the paving of roads, providing the security achieved by employing a police staff or a military, and other goods and services that benefit the community as a whole.
Now, I have heard wild accusations against those conservative economists that believe in limited government stating that these people don’t believe in government at all or think that there should be no taxes levied at all. These ignorant claims come from those who have a political edge to gain. All economists, even those from the conservative/Austrian school of thought, believe some form of taxation is necessary, for the same reasons I have previously stated. The push-back on taxation focuses on the over-taxation of income for programs and projects that not only are unnecessary, but also are contrary to the outcomes that these projects and programs claim to support. While this article is not intended to be political in any way, I wanted to get this out of the way, lest someone claim that I am anti-taxation. Some taxes are necessary, but most are not.
In this 3-part article, I will focus on three things that are affected negatively by taxation. The first one is wealth, and the fact that it is destroyed by taxation.
Wealth Destroyed by Taxation
When taxes are collected from people who have the means to pay it, obviously they have less money to their name after paying these taxes. In other words, their overall wealth has decreased. Wealth is somewhat of a subjective word and can be used to describe different levels of economic success by different people. Nonetheless, whether we are talking about a person that has a modest savings or a person that is a multi-millionaire, each person enjoys a certain kind of “wealth”. If we take the strict definition as a “measure of the value of all of the assets of worth owned by a person, community, company or country” (source: Investopedia) then we see how this word can be subjective. And when any taxation destroys some level of wealth, over-taxation destroys more of wealth. It destroys wealth that is rightfully earned by an individual. It destroys wealth that in many cases creates jobs, gets spent in the economy, but otherwise is taken and used many times inefficiently by government entities that have no incentive to use the money wisely.
Wealth is what people have left over after the spend all of their resources to live their lives. What people do and don’t do with that wealth can have a huge impact on the economy. An individual will most likely use their wealth to buy things, which is a benefit. Entrepreneurs will most likely spend money and may even provide wages to someone in order to help their business become or stay successful. Companies will likely expand their business in the form off capital expenditures, essentially spending money to increase the efficiency and value of their resources (machines, employees, etc). Entrepreneurs and companies (and individuals at times) are all performing these activities in order to build more wealth. And when taxes are collected from these people, inherent in that is the reduction of wealth from those who rightfully earned that wealth. The over-taxation of wealth is both destructive and burdensome.
In the next part, we will look at the burden of income tax on individuals and business.