At first glance, many politicians think it’s a simple equation. Need more Revenue? Just raise taxes. One of the first targets is businesses. It’s easy to paint businesses as the greedy, evil robber barons of the late 19th and early 20th century. And it’s also easy to get a bunch of unemployed constituents worked up over a multi-billion dollar corporation that’s bringing in record profits when most of middle America is struggling to keep it’s head above water. it’s tempting to jump in head first to the “Raise Taxes” pool.
But there are serious side effects to raising taxes on any group or entity. Actions like that can actually have the opposite effect than what is intended.
In a static environment, the formula of raising taxes makes perfect economic sense. Raise taxes by a certain percent, and see an equal, commensurate increase in revenues. It’s not quite that simple. We don’t live in a vacuum. It’s a dynamic economy. Economic activity suffers when tax rates are raised. When a business has less capital to spend on equipment and growing, it stifles expansion. Businesses don’t grow, they don’t hire new employees, or worse yet, they lay off employees. They don’t purchase new equipment they were planning on purchasing. The local automotive garage puts off the purchase of the new Automotive Lift they were planning on purchasing.
Canada recently lowered their corporate tax rate from 18.5% to to 16.5%. They were already lower than our rate here in the USA by a large margin. In the USA, our rate is over 35%. We are on the high end among the major industrialized countries. While the fastest growing economies in the world are cutting tax rates, the USA is raising rates. Canada has received glowing predictions of it’s economic future from major economists and such business publications as the Wall Street Journal and Washington Times. History shows that raising rates can only harm economic activity. Lowering tax rates in the past has actually shown time and time again that tax revenues actually increase due to energized economic activity.
What do you think? Do you have any thoughts or examples to share?