Raising Taxes ALWAYS Hurts the Economy

President Obama has offered the Republicans a compromise. He’ll cut spending if Republicans agree to a tax increase. Obama gives a little; the Republicans give a little. What could be fairer?The Republicans are resisting for several reasons. Some point to similar agreements in the past, which generated large tax increases but few spending cuts. Others are concerned that breaking their pledge against tax increases would be political suicide.However, few politicians or pundits ever mention the most significant reason that Republicans should oppose tax increases: Raising taxes ALWAYS hurts the economy, for at least four reasons…1. A tax increase leaves customers with less money to spend.The less money customers have, the less they’ll spend. In fact, every new dollar that the government takes during hard times likely will cause customers to reduce spending by more than a dollar. We get a “wealth effect” in reverse — a “poverty effect”– and it hurts the economy.2. A tax increase forces companies to scale back or cancel planned expansions.When companies consider new projects, they act only when projected revenues exceed projected costs by a sufficient degree. But adding a new tax burden often reduces projected revenues and certainly increases projected costs. Therefore, new taxes will turn a large number of money-making projects into money-losing or marginal projects. So those new money-losing projects will be canceled wherever possible, which hurts the economy.3. A tax increase starves successful companies of cash needed to fund growth.Suppose a company has enough new products and customers to increase its sales by a healthy percentage each year. When sales grow by some percentage, assets must grow by about the same percentage. And because the balance sheet must balance, the sum of debt plus equity must grow by the same amount as the assets do.So how is the right-hand side of the balance sheet to grow to support the growth in assets? New debt is one possibility. But credit is tight, and it likely will be both tight and expensive in the future. So debt — other than Accounts Payable — won’t grow very much for most companies. Another possibility for public companies is the sale of new stock. But even public companies can’t finance all growth only by that means. The only other major source of funds for growth is Profit After Taxes. In fact, this usually is the key source of funds to support growth for most public and private companies. But because new taxes reduce profits, successful companies will need to limit their growth to the rate they can fund, and those lowered limits hurt the economy.4. A tax increase causes pessimism to increase.Democrats usually want higher taxes; Republicans usually say they want lower taxes. So if Republicans ever agree to a tax increase during hard times, it means that a healthy economy has lost all friends in Washington. Greater pessimism is the natural reaction to a tax increase during hard times. As bad as the economy is now, business and consumers know that a tax increase certainly will make the economy worse in the future. Greater pessimism directly hurts the economy in at least five ways: Pessimistic consumers spend even less. Pessimistic managers slash budgets even more. Pessimistic analysts approve fewer projects. Pessimistic bankers approve fewer loans. And progressive politicians, pessimistic about their next election, demonize business even more loudly, and demand even greater tax increases.…And the economy’s downward spiral accelerates.So when Republicans refuse to increase taxes, they’re refusing to hurt the economy even more. In tough times, that’s the only sane position that a politician can take.But what is insane is how quiet Republicans have been about this topic. Raising taxes always hurts the economy, and Republicans should scream it from the rooftops!