High Taxes

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This article is part of the Intermediate course on Libertarianism and the Austrian School of Economics -> State Interventions

Last updated: 2026-08-20

Analyzing the effects of high taxes on the economy and on poverty requires looking beyond revenue-raising intentions and evaluating the real consequences for human incentives and the production of wealth.

While the defenders of high taxes argue that they are necessary tools to finance public services and reduce inequality through the redistribution of wealth, market economics —and in particular the Austrian School of Economics— points out that high taxes act as a penalty on success, on Saving, and on production, generating severe collateral effects on general welfare (by generating less wealth, poverty is increased).

This is a partial list of the great “basic”/“fundamental” errors of the entire socialist spectrum, which apply to the idea that the government should have “high taxes” in order to “redistribute wealth”:

Not understanding that wealth is created and therefore the pie to be shared grows for everyone.
- Read -> Poverty and Wealth
By investing his savings a capitalist is already distributing wealth. He pays the worker right now what he may not be able to sell in the future.
- Read -> Böhm-Bawerk's devastating critique of Marxism
Believing that the size of the wealth pie is fixed, so when someone has more wealth he stole it from someone else.
- Read -> Montaigne's Fallacy
- Read -> Böhm-Bawerk's devastating critique of Marxism
Believing that wealth is gold, and not understanding the concept of capital.
- Read -> Bullionism
- Read -> Theory of Capital

The main economic and social impacts are structured as follows:

1. Effects on the economy and growth

Disincentive to saving and investment:

Saving is the engine of long-term growth because it finances investment in capital goods and technology.

If the State heavily taxes profits, returns on capital, or personal saving, it drastically reduces the incentive to risk capital in new entrepreneurial projects.

Flight of capital and talent:

Capital and highly skilled professionals are mobile. Faced with asphyxiating fiscal pressure, firms move their investments to more competitive jurisdictions (they leave the country) and talent emigrates, impoverishing the productive base of the country of origin.

Lower productivity and stagnant wages:

With less investment in machinery, modernization, and innovation, workers’ productivity declines.

In the long run, real wages cannot rise if productivity does not grow, which has a direct impact on the population’s purchasing power (more poverty).

2. Direct effects on poverty and informality

Although the theoretical justification of high taxes is usually “the fight against poverty through assistance programs,” their systemic consequences often produce the opposite effect:

The expansion of the informal economy:

When taxes on formal labor and on firms are confiscatory or excessively complex, a powerful incentive is created to operate outside the law (black markets).

The informal economy grows out of all proportion; however, informal workers lack social security, pensions, access to formal bank credit, and labor protections, remaining in a situation of extreme vulnerability in the face of any crisis.

Destruction of the tax base (The Laffer Curve):

Beyond a certain point, raising taxes does not increase revenue; it reduces it.

By choking economic activity, firms and formal jobs are destroyed, shrinking the total size of the economic pie. Fewer formal firms mean fewer net taxpayers in the future.

The mirage of redistribution:

State assistance financed with high taxes can relieve emergency situations in the very short run, but if it destroys the incentives to create genuine wealth, the country becomes ever more dependent on unsustainable state subsidies.

As the private sector shrinks, the State is left without the real resources needed to keep its own social-assistance promises.

In conclusion

For the liberal and Austrian view, the best antidote to poverty is not fiscal redistribution, but sustained economic growth, which is possible only in an environment of low taxation, legal security, and a free market that rewards effort, encourages saving, and attracts productive investment.