by Will Emprise

Created on: February 26, 2008

This is somewhat of a trick question because it determines what the government does with the taxes. If the government itself builds new business buildings, sends people to business school, teaches them to become MBAs, accountants, and engineers, then taxes could actually be great for the economy. If the government taxed money away from leisure activity and provided it to people trying to start new businesses, taxation could be great for the economy, but the US government is not permitted to do this. The American philosophy believes that the US government should stay out of business affairs.

Instead, what the American people allow its government to do is usually a hindrance to the economy. The US people allow the government to spend money on healthcare programs for the poor, welfare, and educational subsidies. Immediately, these expenditures are not as easily identifiable as a benefit to the economy as a new business start up would be.
The Reasons for the Drain on the Economy are Unusual

People that are angered by high taxes hide their money. This hurts the economy because this money is out of the banking system. Hidden money cannot be loaned out by the banking system, and so the economy has a tendency to act in a restrictive manner. In addition less money in the bank means higher interest rates on loans which reduces the amount of business start ups. So here is how the story goes.

The government raises taxes. People become enraged that taxes are raised once again and hide their money in safety deposit boxes, storage units, and in wall safes in their houses in stead of putting it in the bank, (meaning they earned cash but didn't record it). The hidden money restricts cash in banks. Lower amounts of cash in banks drives up interest rates, by a simple supply-demand relationship. Higher interest rates yield that less people are able to afford business start ups. Less business start ups leads to less people being employed by that new business start up. More people being unemployed leads to even less money being put in banks, AND even more money being required by the government to help keep these people alive by feeding them and giving them housing subsidies.

It's the anger at the taxes and the hiding of money that leads to a languishing economy.
If instead the United States received the income from taxation and paid for those that need food, and paid for those who needed medical attention, and the United States showed a surplus of tax revenue, the US could then invest money into the infrastructure and the economy. Think faster highways, more rails, more educational subsidies. The effect is that these eventually lead to a superior economy. Faster highways, and more rails, helps people get things done faster. More educational subsidy increases the likelihood that soon people in colleges will come out and eventually invent new better things, or develop scientific advancements, that those taxed people will have the ability to enjoy. Plus, inventions and

scientific advancements boost the economy, but not immediately.
Many people simply feel that increased taxes are going to feed a large amount of poor people who are not willing to work. This idea is itself the fuel which leads to the hiding of money and the shrinking of economic activity.

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