The Effect of Income Taxes on Economic Growth

A tax cut does not necessarily help or hurt an economy. You must consider what the revenue from those taxes is being spent on before you can determine the effect the cut will have on the economy. From this discussion, though, we see the following general trends:

1. Cutting taxes and wasteful spending will help an economy because of the disincentive effect caused by taxation. Cutting taxes and useful programs may or may not benefit the economy.

2. A certain amount of government spending is required on the military, the police, and the court system. A country which does not spend an adequate amount of money in these areas will have a depressed economy. Too much spending in these areas is wasteful.

3. A country also needs infrastructure to have a high level of economic activity. Much of this infrastructure cannot be adequately provided by the private sector, so governments must spend money in this area to ensure economic growth. However too much spending, or spending on the wrong infrastructure can be wasteful and slow economic growth.

4. If people are naturally inclined to spend their own money on education and health care, then taxation used for social programs is likely to slow economic growth. Social spending which targets low income families is much better for the economy than universal programs.

5. If people are not inclined to spend towards their own education and health care, then there can be a benefit to suppling these goods, as society as a whole benefits from a healthy and educated workforce.

Before I get an inbox full of hate mail, I am not suggesting that the government end all social programs. There can be many benefits to these programs which are not measured in economic growth. A slowdown of economic growth is likely to occur as these programs are expanded, however, so that should always be kept in mind. If the program has enough other benefits, society as a whole may wish to have lower economic growth in return for more social programs.

Admittedly this article oversimplified some very important issues. However that is usually necessary in a first look at an economic problem. I plan on dealing with some of these specific issues in more depth in the future. I'd love to hear your take on the issue and what you'd like to see covered in more depth in the future. If you'd like to leave feedback about this article, please use the feedback form.

Previous

• 1
• 2
• 3
• 4
• 5

Next