Increasing Taxes Worsens the Economy

Tax Hikes Cost Economy Far More Than They Add in Spending

November 2, 2012

Increasing taxes to pay for government spending results in a higher economic loss for the public, say Ernest S. Christian and Gary A. Robbins, executive director and the chief economist, respectively, of the Center for Strategic Tax Reform in Washington, D.C.

• Between 2013 and 2022, tax increases will do $2 worth of damage for every $1 of added tax revenue.
• In 2013 alone, income taxes will account for $270 billion in government revenues.
• But the public will experience economic loss that is $540 billion in deadweight loss (the economic cost of tax increases).

In the end, the public suffers more harm because of the tax increases in the form of either fewer private sector jobs or lower living standards. According to economists, if income tax rates are increased in January, $1 of tax revenue will cost the public $2.50.

Furthermore, if the tax increases go through in January as planned, the increase in taxes on dividends and capital gains will deter investments which are the primary factor in creating jobs. Moreover, the deadweight loss on the tax increase will be about $3 for every $1 in tax revenue.

The economic incidence -- or the burden of who pays the taxes -- falls on the shoulders of low- and middle-income families. Not only because there are less opportunities for jobs, but because they don't receive a good return on the social services they paid into.

Tax reformers argue that deadweight loss can be reduced by lowering rates and reducing the penalties on job-producing personal savings and personal investments. 

With lower deadweight losses, the economy will be more efficient with more jobs, an increase in incomes, and reduced debt.

Source: Ernest S. Christian and Gary A. Robbins, "Tax Hikes Cost Economy Far More Than They Add in Spending," Investor's Business Daily, October 23, 2012.