The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group, but for all groups.
This is an ongoing series of posts on Henry Hazlitt’s Economics in One Lesson. You can access the Table of Contents here. Although written in 1946, it still touches on many of the issues we face in 2017, particularly the fallacies government economic programs are built upon.
Remember, there is no such thing as a free lunch. Tax dollars come from people and businesses who would otherwise have used to those dollars to do something.
Henry Hazlitt doubted greatly that the wealth created by government spending would fully compensate for the wealth destroyed by the taxes imposed to pay for that spending.
It is not a simple question … of taking something out of the nation’s right-hand pocket to put into its left-hand pocket.
While the government spenders want us to believe that if they only take, say, 25% of the national income from private purposes to spend on public purposes, they neglect to mention that they are taking money from A in order to pay it to B. It’s not simply moving data around in a bookkeeping ledger. Yes, B is helped by the transfer of wealth, but A is harmed by that loss of income.
In our modern world there is never the same percentage of income tax levied on everybody. The great burden of income taxes is imposed on a minor percentage of the nation’s income; and these income taxes have to be supplemented by taxes of other kinds.
This affects business policies. Businesses that have less money to invest don’t expand their operations — or only expand into areas with minimal risk because they lack a savings cushion. This deters other observant people from starting new enterprises. Old employers do not provide more employment or better wages and others decide not to become employers at all.
There’s a similar effect on personal incomes taxed at 50-90 percent. People question whether they should work six, eight or 10 months a year for the government when they only take home six, four or two months of income to their families.
Additionally, the capital available for risk-taking itself shrinks enormously because it is being taxed away before it can be accumulated.
[C]apital to provide new private jobs is first prevented from coming into existence, and the part that does come into existence is then discouraged from starting new enterprises. The government spenders create the very problem of unemployment that they profess to solve.
Hazlitt recognized that some taxes are necessary to provide government functions that safeguard private production.
When the total tax burden grows beyond a bearable size, the problem of devising taxes that will not discourage and disrupt production becomes insoluble.
In other words, government should only spend on a very few needed services … roads might come into that … because if it takes too much from the private sector, eventually it destroys the private sector.