Someone asked me the other day if incresed taxes mean less jobs. While it may seem obvious to the smarty pants out there I figured that if he didn't understand someone else might not as well. The easy answer is because they are inversely proportional, but why they are takes a bit more explanation.

The goverment can tax you in many ways, sin taxes(taxes on items they think you shouldn't buy -- like smokes and booze), sales taxes, property tax and income tax are the obvious ones. All of these taxes have similar effects in that they take away money you can spend and give it to them. How they take away money and how they change your spending behaviours(planned or unplanned) is another discussion. With less money to spend you buy less. If this happens to everyone else too then there are less things and services bought. You may go to one less movie a year, or buy one less pair of shoes. This seems small to you but this is happening to 250 million other Americans too. That means 250 million less movies watched. That hurts the movie industry ability to create decent movies and so we get films like "The Happening" that are total crap. This also means that we need less theaters and less theater workers. Now obviously this is a closed environment, because the movie industry can offer deals to edge out your desire to have pizza. Maybe you order less pizzas and goto the same amount of movies, then the pizza industry is affected too. Of course as less pepople work for the theaters, they aren't spending money either. Maybe since they aren't working they aren't ordering pizza or going to the movies. Therefore the system feeds on itself and becomes circular.

Okay that was a bad idea. Let's just raise taxes on corporations. Okay if you take the money away from the corporations they are going to have less money with which to pay employees. Then they are going to have to cut staff, leading to the same result as before. The difference is that this time it is quicker, ebcause we don't have to wait for the company to loose money from lower sales.

You know the rich have a lot of money, we can take it from them! While it is true they have more net worth than you or I, they don't always have more money.  Rich people and people with investments in general don't have a big pile of money they can jump in and swim. They have investments. Investments can be in the form of stocks, bond, real estate or a Quizno's. If rich people have less money, they are les likely to purchase a Quizno's and the resulting effect on jobs is obvious. No Quiznos = No Jobs. More traditional investments like stocks and bonds are a different story. If your house payment is coming due and you don't have enough cash but you have a lot of stock, you may sell some. You aren't selling because it is a good time you are selling because you need cash., so you aren't going to find the best deal. (Also with a capital gains tax you have to sell more stocks in order to get the amount you need which compounds the issue.) If you sell enough, or there are enough other people doing the same thing the value of the stock is going to go down. Stocks and Bonds are created by companies to get cash so they can do things like buy factories and hire employees. If they get less money per share they sell, then they aren't going to be able to hire as many people. The lower the stock price goes the more people are going to sell and so the price will continue to fall. This will cause more people to loose value in their stocks and so when it comes time to make the next mortgage payment they are going to need to sell more shares. This also hurts the value of the middle class retirement plans whch are heavily invested in stocks, because we aren't allowed to diversify outside of the stock market like the rich can. Another aspect to the paradigm is the rich people also will buy fewer Bentleys when they have less money coming in too. This means that there won't be as many Bentley mechanics and Bentley sales staff. So that means less jobs from them as well.

Many of these results take effect long after the implementer has left. This is because for instance you aren't going to have less of a need for Bentley mechanics the day you cut taxes. It will come over time, as the owners decide on a new car. This is a highly simplified example and dosen't take a lot into account, but it does give you an idea of how the machinery works under the hood. Tax plans are rarely as clear cut as these examples. For instance in 1993, the goverment cut taxes on the poor but raised them on the rich for a cumulative tax increase. This slowed the economy but it took until 1999 for the economic growth to stop. We could have an entire discussion on how these cuts directly benefited and doubled the growth in companies like Walmart but that is a different discussion. Overall when and how to finance our government is a tricky problem, and deciding to cut or raise taxes have long reaching effects.