The Raise Taxes, Lower Spending Lie

A common refrain from the anti-Tea Party set is that lowering taxes will not help reduce the deficit.  Raising taxes will, so the argument goes, coupled of course with spending reductions.  Really.  Let’s take a look at that claim.

First, where does money come from?  Careful, that is a trick question.  Money comes from printing presses.  Wealth, the stuff people actually use, comes from business.  No matter how small or how large, it is a business that makes everything from tires to toilet paper.  You create wealth if you contribute to a business, whether it is your own self-run cleaning service or IBM.

In order to create wealth, a business has to take something (a raw material, which can include ideas and other intangibles) and turn it into something more valuable (a finished product or service).  No input, no output.  Those nasty ol’ profits that rich people make, which the Krugmanites think are better confiscated and spent by the government, are exactly what allow and entice people to do good for others through commerce.

Higher tax rates invariably stymie at least some of the productive value of those profits.  As rates get higher and higher, fewer and fewer resources are available for businesses to produce more wealth.  At some point, it ceases to make sense for anyone to be truly productive.  Witness Cuba and North Korea.

We have allowed our government to take more and more of the wealth generated by business and make impossible promises for the future.  Now even borderline Marxists grudgingly note that it cannot be sustained–we must do something about the deficit.  And what might that be?  Raise taxes!  (Oh, and reduce spending.)

In addition to the fact that raising taxes kills wealth creation, Congress never uses the extra tax money for deficit reduction anyway.  They spend it.  Here’s the kicker: They actually spend more than the extra they take in.  Even if I were to believe that raising taxes would help reduce the deficit, I would not trust Congress to actually use it for that.


Terry has been thinking about flying just so he can be fondled and groped.  Is that wrong of him?

About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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