Job-Creation Schemes Don't Work

6 Pages 1532 Words

Free-market economists like myself attack government tax-and-spend policies as being damaging to prosperity, accusing the government of "sucking money" or "leeching resources" out of the economy. We claim that taxes damage not only the welfare of the person from whom they are taken, but the whole country.

Politicians, supporters of state spending, and even questioning students often challenge this negative view of taxation with the positive effects of public spending. In essence, the argument runs something like this:

Say man A makes $100,000 and man B is unemployed. The State decides to create a government job for man B. To do this, they tax man A $50,000 to pay for man B's salary. Surely the $50,000 that man A lacks is now in the hands of man B, who will spend it in the economy instead? Therefore shouldn't there be no overall loss to the economy, but more people employed?[1]

This is the old 'zero-sum' fallacy; the politicians' belief that the size of the economy is fixed and they only have to decide how to divide it up. Austrian economists, with their focus on the real world and human nature, know better; wealth does not just exist, it has to be created, and the disincentive effects of government actions do not just distribute wealth—they actively destroy it.

Taking $50,000 from A through taxation reduces the economy not by $50,000 but by more, much more. Studies in the USA and Australia suggest that the damage caused by $50,000 of taxes could be over $130,000. [2] This means that even when the $50,000 taken from A is returned to the economy via B, there is still a net loss of $80,000.

This comes about through a variety of disincentives, of which the most important is the impact on A.

A's $100,000 job now only brings him $50,000 of after-tax income. Now a $100,000 job commonly involves more time, responsibility and stress than a $50,000 job, hence its higher rewards. A used to be compensated for this by his highe...