Friday, August 22, 2014

Consequences of Raising Taxes or Reducing Expenditures

The survival of a government depends on the amount of taxes it collects from businesses and individuals that it protects or calls citizens. Raising taxes affects everyone as it reduces the amount of money one can own or have in possession. Raising taxes is common in any government as there is always the need to make changes to the monetary circulation a government can have. Governments raise taxes to stay on track and ensure the economy is in good shape. No government would like to be embroiled in simmering bankruptcy.

Raising taxes gives criminals leverage over control of commodities because contraband becomes commonplace as criminals move large quantities of hoarded commodities across territories to make hefty profits. Raising taxes does not replenish the public purse in anyway; instead it pushes economic activity away from the general market thus allowing buying and selling activities to become surreptitious. Consequently, commodities will end up underground in an environment that is far from the reach of legal authorities. According to Hyman (2011), the mention of tax in the U.S. brings a reflection of April 15 when federal and state income taxes become due. Taxation was so unpopular in the 19th century United States such that it was impossible to administer (Hyman, 2011).

Raising taxes strangles consumer expenditure. People spend when they have money to spend. Taxing people means they have less money to spend. Raising taxes leads to reduced Gross Domestic Product (GDP) and also causes the economy to contract. On the other hand, reducing taxes allows the economy to grow. Tax increases can have negative consequences on employment. Taxing businesses and individuals can lead to budget cuts and layoffs. Reducing taxes allows employees to create more jobs.

A tax hike is bad for investment because businesses will be forced to pull out of markets. Those investing in stock markets will be compelled to cease competition because of the rising taxation that diminishes their investment power. Raising taxes is the gateway to increased crime and poverty. When the government raises taxes on the people, homelessness, evictions and foreclosures become commonplace and income diminishes and wages plummet. Reducing expenditures has its consequences. Governments, mainly those engaged in military confrontations, have been found to increase expenditure to counter rebellion (Collier, 2006).

Designing a Balanced Budget Amendment without Cutting Back Expenditures or Raising Taxes in an Economic Downturn

Balancing the budget has become a common phenomenon in the United States. Politicians often struggle to come up with measures that they think valuable in terms of avoiding economic downturns. When revenues equal expenditures and neither any sort of deficit nor surplus exist, economists see a balance in the budget. Using Keynesian economics, mainstream economics usually prefer a cyclical balanced budget which is balancing the budget cyclically or over the economic cycle and not necessarily budgeting year-to-year.

There are two clashing sides on budget issues: those who believe the government should raise taxes and those who believe the government should spend less. Balancing the budget is important for a government that wants to avoid overspending as it also places a check on official representatives who are fond of free spending. Without a balanced budget, politicians and agencies will be tempted to hide money belonging to the government. Money held secretly may be dispensed later for personal selfish gains by the same politicians and agencies. Balancing the budget helps the government to account for every penny and overcome rampant fraud and waste. Currently, the U.S. government is working on measures to reduce discretionary spending to jumpstart job creation and find skills for American workers. 

Collier, P. (2006). War and military expenditure in developing countries and their consequences for development. The Economics of Peace and Security Journal, 1(1), 10-14.
Hyman, D.N (2011). Public finance: A contemporary application of theory to policy (10th ed.). South-Western, Cengage Learning. 

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