Disadvantages of Taxes

  Reviewed by: Ryan Cockerham, CISI Capital Markets and Corporate Finance      Updated October 19, 2018
  Written by: Gregory Hamel
Disadvantages of Taxes

Governments impose taxes on individuals and businesses to cover operating expenses and finance projects. Taxes can be levied at the local, state and federal levels on income, sales, property and other activities. While some level of taxation is necessary to fund government operations, excessive taxation can have negative consequences. Taxation is a controversial economic and political issue, so people are likely to disagree about the advantages and disadvantages of taxes depending on their personal opinions.

Understanding Consumer Spending

Taxation has the potential to decrease consumer spending, because taxes take money away from consumers and reduce disposable income. Lower consumer spending tends to decrease business revenue, which can put negative pressure on hiring and investment. High taxes may inhibit economic growth, and the government sometimes institutes tax cuts during periods of economic hardship to encourage spending and growth. Opponents of taxation may also argue that taxes act as a disincentive to work, since they reduce the direct financial reward of earning income.

Evaluating Business Expenses

Taxation can increase the expenses that businesses face, which makes it more difficult for them to achieve profitability. Businesses pay numerous taxes, such as payroll taxes on employee wages, property taxes, business taxes and fees for permits and licenses. Business-related taxes leave less money for expanding businesses through investment and hiring. High business taxes may encourage outsourcing of operations abroad.

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Redistribution of Wealth

Taxation is sometimes referred to as a "redistribution of wealth" because different people face different tax burdens and some people benefit more from government programs than others do. The federal income tax is a progressive tax system, which means that those with higher incomes pay a greater proportion of their income in taxes than those with lower incomes. For example, a high-income attorney might face a top federal tax rate of 37 percent -- and as much as an additional 13.3 percent in high-tax states such as California -- while an underemployed worker might not pay any income tax and rely on financial assistance from the government. Critics argue that this system punishes success.

Exploring Government Power

Taxation increases the power of government, because a government can support more programs if it has more revenue. Opponents of strong government argue that the private sector rather than government agencies should allocate resources and provide services. Government agencies may be influenced by external factors like politics and special interest groups, while private companies tend to focus on profitability, which requires efficient use of resources.

About the Author

Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.

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