Myth: Higher Taxes Reduce Consumer Spending

Gary North - February 06, 2020

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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Published on December 27, 2012. The original is here.