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Myth: Higher Taxes Reduce Consumer Spending

Written by Gary North on December 27, 2012

There is fear that the fiscal cliff will lead to spending cuts by the government. This will reduce consumer spending, we are told. But will it? Why?

There will be no spending cuts. There will merely be a slight reduction in the increase of government spending.

We are told that higher taxes will also reduce consumer spending. Will they? Why?

When the government collects taxes, it spends the money instantly. It sends out checks.

The people who cash the checks put the money in their bank accounts. Then they spend it. Soon.

The people who are on the government’s dole are not savers. They are spenders . . . just like the government.

Tax revenues do not reduce government spending.They therefore do not reduce consumer spending. Tax revenues change the recipients of the money. Higher tax revenues move the money from consumers who produce in a free market to consumers who are on the take from the government. This reduces liberty, but this shift takes time. It reduces productivity, but this also takes time.

To imagine that consumer spending falls when the government collects taxes is to imagine that the government turns all of this money over to a bank, which then deposits all of this money with the Federal Reserve System as excess reserves.

The money gets spent, fast. To imagine otherwise is to imagine the federal government as a thrifty agency that is running a budget surplus.

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9 thoughts on “Myth: Higher Taxes Reduce Consumer Spending

  1. H. J . Durham says:

    There are two features to your statement that should be noted. The first is that there is a 'toll for the troll' cost to government transfer payments that DO reduce CONSUMER spending, and convert it to GOVERNMENT spending. Different analyses come up with numbers as high as 30% of government revenues are lost to taxpayers due to those costs, a major component of which is the sheer inefficiency of big government. (to be continued)

  2. H. J. Durham says:

    The second is that it DOES take the money from "from consumers who produce in a free market" to those who do NOT. THAT leads to even more inefficiencies and distortion in the consumer segment, as well as depressing motivations to produce more. So, in the long run, I contend that yes, consumer spending IS reduced by higher government spending and taxes, but agree it is an indirect, long-term effect, not an immediate effect. The problem of detecting the true cause of an economic downturn is made more difficult by Friedman's showing the lag between policy changes and the economy showing its impact. It is clear that no one in the current administration seems to understand any of the theories on economic growth, and certainly none about the lag time. Or, to put it in current policy terms, the only theory they seem to grasp is "Gimme!"

  3. You miss one salient point. Higher taxes necesarily cause higher consumer prices as businesses pass their costs on to their customers. Are you suggestingthat higher prices don't affect consumer spending?

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  4. I won’t spend as I normally would. I have been changing our spending habits since obama first came into office. I am even with a bank that took no tarp or stimulus. I see many “acting” as though everything is copasetic, okie dokie. We are not rich, my husband works, but at some point, the foolishness in Washington has to stop. I usually buy local and from small businesses. My first question I ask myself when buying a Chinese product is, “do I really need it”. We as Americans need to take the start, Washington hasn’t a clue.

  5. Christian Believer says:

    At this point, the common script is worth MUCH less than is commonly accepted in the marketplace. Anyone who cares to read about the situation may do so, easily. Even easier, masses of people have access to the Internet and can view videos,etc. that explain the situation. Anyone foolish or ignorant enough to ignore the obvious signs is going to suffer tremendously over the next few years. Educate your friends and warn your enemies, if you have the spine and moral compass to do so. God bless you.

  6. Great line that sums up the essence of government: "Higher tax revenues move the money from consumers who produce in a free market to consumers who are on the take from the government."

  7. Very, very well put, Gary. I think those who disagree with you don't really get the concept. You personally might be limited in your spending by the government's confiscation of your money, but the persons receiving the loot are enhanced in their spending ability. That also includes not only the end recipients, but also the bureaucrats who take a cut of the loot for their salaries (Gary forgot to mention them). Government is the largest employer in the country. Those who work for government have far higher salaries and benefits than those working comparable jobs in the private sector. In other words, they're overpaid, since wages in the private sector are set by the market. Eventually, every bureaucracy exists for its own sake, i.e., keeping lots of people employed in the public sector, building the bureaucrats' little fiefdoms, and enhancing the overall power and control of the government.

  8. Having said all the above, a reality check: The government could completely finance itself with its money-printing operations. But if they were to do that, the jig would be up. So they tax us to make it look good, like tax money is the source. Also, taxation is a fabulous means of controlling the population, especially with the income tax, since that involves our accounting for every penny that passes through our enslaved hands.

  9. Isn’t the writer overlooking the “unseen” – the lost entrepreneurial dollars that would have been invested to grow the economy and make more jobs that pay more wages that would have contributed to consumer spending?