Negative Effects Of Federal Spending

Federal spending is paid for by taxes, and taxes wield a cost on the economy. This “fiscal drag” stems from two things. Firstly, taxes take money out of citizens’ pockets, which necessarily diminishes their purchasing power and therefore their utility. The government can create jobs, but using money that individuals could otherwise buy televisions or take a longer vacation. However, taxes do not necessarily create jobs, but merely moves them around, or, on net, destroys them. Its costs are hidden behind the immediate effects of increased employment and new products, but these taxes often have harmful results. A more subtle effect is that taxation causes individuals to change their behaviors in ways that make the economy worse off without necessarily providing any revenue for the government. …show more content…
For example, if income tax costs fifty cents for every earned dollar, some people may leave the labor force because they want to bring home every dollar they earn. It is a lose-lose situation because those people who wish to work quit their job, and the government does not raise any capital. Taxes also discourage investment. People often may think that certain investments, such as a risky stock or a college education, are not worthwhile in the long run due to the excessive taxation. The higher the tax, such as a capital gains tax, the lower the return on the investment. The cost of this is that people are less inclined to make investments and more likely to encourage current consumption. These investments make individuals more productive in the long run and therefore richer, while consumption will make them happy today but nothing to advance their wealth tomorrow. Many economists agree that cutting taxes and rolling back regulations would unleash productive forces in the economy because these taxes often discourage work and