There is a killer on the loose that can steal, kill, and destroy the economy: high taxes. In areas of the world where taxes are very high, economies are generally very weak. Where taxes are low, economies are usually much stronger. Clearly, the advantage for any government is to keep taxes in line in order to keep the economy humming. Let’s take a look at just how low taxes can fuel economic growth.

Some politicians fail to grasp an essential point when it comes time to raising taxes: the more taxpayers have to pay in taxes, the less discretionary money they have available to them. Specifically, high taxes hurt because:

Businesses have less to invest. The bottom line for every business is profit. When a business makes a profit, they have more money to spend on other things including: hiring additional employees, expanding their business, contributing to the local economy, etc. New employees, means more tax revenue as employees pay social security taxes, incomes taxes, etc. More profit means that the business will funnel some of those profits back into the business in the form of expanded services, a newer building, the purchase of goods and services, etc. In addition, the local economy benefits when a business is thriving through their share of property taxes paid, and discretionary funds to donate to local causes, community events, even state backed groups such as the symphony. Raise taxes too much and it will have a ripple effect on the way that businesses help out the local market.

Consumer confidence nosedives. Consumers who feel too much of a tax burden will pull back and not spend. When consumer confidence drops, everyone suffers. The purchase of vehicles, homes, discretionary goods, and the like will drop. Instead of purchasing higher end items, consumers will opt for the best prices thereby threatening entire areas of discretionary spending. On the other hand, if consumers believe that they have enough to live on, they may go ahead and purchase that new vehicle now instead of waiting a year or too. Guess what? The state government reaps a nice tax on the purchase of a new vehicle too!

Cash strapped governments often plead for additional revenue through higher taxes. Instead of resorting to automatic tax increases, taxpayers should demand that governments consolidate services, trim expenses, and put a freeze on hiring until they get their house in order. Failing that, consumers and businesses can expect stifling increases that can only hurt the economy.