How Taxation Affects The Economy

By Author: Jeff Parrack
Total Articles: 4762
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Whole sections of libraries are given over to stockpiling the thousands upon thousands of books that deal with how taxation affects the economy. It is instructive to recall that economics is called "the dismal science" for good reason, in that it lacks much of the predictive power of scientifically sound theories in physics or biology, and is much more akin to such "soft sciences" as history and linguistics. Since economics is the study of human action -- the title of a major work by the late Austrian school economist, Ludwig von Mises -- there are literally hundreds of millions of ways that the choices of individual Americans can affect the greater economy.

When speaking about taxes and their economic effects, we are reduced to speaking in generalities, although they can be rigorously articulated and do not have to devolve to campaign rhetoric ("soak the rich," "eat the poor," etc.). One lesson well learned from the experience of totalitarian nations, particularly socialist and communist ones, is that no central authority can ever obtain, analyze or base policy decisions on all the knowledge that is dispersed throughout ...
... a society. People in modern technological societies, generally speaking, want to make their own decisions about the color or style of their shoes, or the kind of cars they drive -- although many are just as quick to want to control the actions of others. One of the major ways that governments control these behaviors is through taxation. The first federal marijuana law, in fact, was a tax act.

More than income is taxed
One must also remember that the term "taxation" applies to a whole lot more things than just the forms most of us fill out by April 15th. Income taxes are, in fact, only about one-third of the U.S. government's revenues, which come from a staggering list of excise taxes, sales taxes, user fees, fuel surcharges, tobacco settlements and other sources. People have to be reminded, as well, that governments create no wealth, none at all, but merely collect monies from those who have it and redistribute it in ways that are determined, not with logic or financial acumen, but according to the political battles continuously taking place at federal, state and local levels.

The money that the government does extract from John and Jane Doe is money that the Does themselves are unable to spend. By the time taxes work their way through the government bureaucracies, only a fraction is applied to the stated needs. The huge overhead, wastefulness and sheer incompetence of governments -- just about all of them, just about everywhere, for just about all time -- is something that really needs no further explication. Supporters of the status quo are left paraphrasing Winston Churchill to the effect that Western democracies (the U.S., of course, is a constitutional republic) are terrible forms of government, but the others are much worse. This is cold comfort to Americans who support the notion of fiscal responsibility in the national and state governments.

Opportunity costs and waste
That money the Does were unable to spend? It involves a thing called "opportunity cost." The Does lose the opportunity to save more for the children's college or build a new room on the house because that money is going down the black hole of government spending. Regardless of your politics and your notion of the most equitable tax system, this is a subject that must be dealt with seriously, and soon. It comes down to the question of just who will determine how money is spent in this country -- and not just public funds, either. The effects of taxation on people's careers, living situations, places of residence and ability to save for the future are huge and growing all the time. Is such centralization a good thing? You may think so, but if you eventually change your mind you may find that you have waited too long to do anything about it.

One of the basic foundations of American constitutional law is the Supreme Court decision in McCulloch v. Maryland (1819). It is noteworthy not merely for what it said, and the issue it settled, but for the way in which it characterized the taxing power of the U.S. Ruling that the Constitution exempted the federal government from state taxation, Chief Justice John Marshall opined that "the power to tax [is] the power to destroy." He went on to say that states and local governments "have no power, by taxation or otherwise, to retard, impede, burden or in any manner control the operations of the constitutional laws enacted by Congress."

Taxation clearly has the power to destroy, as well as retard development, impede progress, burden the populace and, in effect, control people through a series of carrots and sticks (mostly sticks). On the other hand, most honest assessments of government waste put it at about one-third of the total annual budget, of the U.S. or any state you care to name. Considering that income taxes are one-third of the federal revenue, is it reasonable to wonder if the income tax could be done away with if governments learn to live within their means and stop wasting money? Or is a flat tax a workable alternative? These are the questions that will echo back every time someone wonders how taxation affects the economy.
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