Tax increases and new taxes kill economic growth. We’ve been talking about economic indicators which point towards a depression. Strangely, this is a debated topic, but it is quite easy to prove economically. The history of the world is also replete with examples of high taxes stifling economic growth and low taxes leading to amazing growth in places that would not seem to warrant it. 100 years ago, Hong Kong was simply a piece of rock off the coast of China. But because it allowed free enterprise and had low taxation, this desolate rock flourished into a leading world economy. At the other extreme many wealth countries have gone the way of higher taxation only to see their economies dry up. There are plentiful examples of both situations throughout the history of the world.
However, politicians gain money and power by taxing and so there is always debate over an issue which history has firmly settled. It should also be noted that it does not work to have low taxation and high spending. This may seem like a paradise to politicians, but it leads to ruin.
All this being said, taxes are going up in the United States. We’ll name a few definite and one potential tax increase on the horizon.
- Investment Tax increases in the recently passed health care legislation. These only apply to higher income earners, but this money that would have gone into the economy and spurred growth will now go to the government. Economic growth will be stifled.
- The “Bush Tax Cuts” ending. Ten years ago, the government lowered income taxes for all Americans. These cuts end on January 1, 2011. This increase in tax rates will constitute the largest single tax increase in the history of the United States. How do you think this will impact economic growth?
- The Estate Tax Ending. In 2010, there is no estate tax. The money that a family earned and paid taxes on throughout their life can go to their heirs without taxation. In 2011, this one year hiatus will end and the estate tax will be back. This doesn’t have as great of an effect, however it does destroy some family businesses and farms which must be sold to pay the tax.
- The Value Added Tax (VAT). This has not been instituted yet, but is being discussed in Washington. This is a tax that must be collected by each person in the business supply chain as value is added to a product. Politicians love this because the customer (voter) never actually sees the tax. However, the tax is there and is obviously paid by the consumer whether he sees it on his bill or not. Thus, the cost of everything in society goes up drastically, which means people have less money and the economy suffers. Most European countries have this tax and each time it is implemented, the government can then go back in and increase the tax very easily.
We’ll next look at the problems facing our cities and states.
This is Part 6 in the series Economic Depression. To continue with this series, click on Pt 7. To use this as a growth tool to better understand your own calling, please read Part 1, Pt 2, Pt 3, Pt 4 and Pt 5.
Photo credit: alancleaver 2000