Hazlitt shows us that there is another problem that we must account for when taxes are taken from one group of private individuals and then pay for another project. Pretend that the national income of a country is 20billion dollars. A tax of 25% simply takes 5billion out of the country's right pocket and puts it into the left pocket, correct? That's what it seems like. This type of fallacy assumes that there is just a fixed amount of money to be made, and it regards this transaction as merely some kind of bookkeeping trick. However, if you take money out of A's pocket and put it in B's pocket, the effect it has on B is seen, and the effect it has on A is forgotten because it is unseen. All you can really count is the money taken from A, but there's no way to count what A could have turned that money into, and what kind of wealth A could generate with it for others. 

People also forget that not everyone pays the same amount in taxes. In fact, only a small percentage of Americans actually are shown to have a net loss through paying taxes. Whereas most families in the middle class or the poor see their taxes' monetary value "made up" through subsidies, welfare, or a tax return, it is only the small productive class that actually "pays in" genuinely. The rest of the programs that make up government spending are made up through borrowing and inflation, but we'll get to that in another chapter.  The fact of the matter is, if a business has to pay 60% of every dollar it earns to the government, yet if the business loses money, it loses 100% of every dollar lost, it doesn't make that business want to expand, unless the risk is low enough to justify the profit. When there is no risk taking, there is no innovation (or very slow innovation), and a lack of innovation, competition, and productivity is what hurts a society. When there are fewer goods to go around, society has a net loss. Why when businesses lose money, they lose all of their money, but when they make money, they must give up some of it? The only businesses this helps are those that are already established and can afford such high taxation. Real wages, or the strength of what a consumer's money can buy, are held down because consumers are forced to pay higher prices for goods that could be more abundant and cheaper. 

There is a lot of envy and hatred for the so called "rich" in the United States, and that we should tax their incomes 50, 60, 75, or 90% of their income in order to pay for the free goodies of the poor. If you were taxed that much money, however, why would you work six, eight, or ten months a year for the government, and only six, four, or two months for your family? When people lose the entire dollar when they lose, but only keep a dime when they win, it makes the game seem not worth it, and people don't take risks and start new projects to satisfy others with their resources. If business isn't permitted to grow, these are jobs that are never created. If the profit is to be so heavily taxed, some won't try to earn a profit in the first place. Then, since there is no profit to take tax from, there is no money for the government to spend on people that don't have jobs because jobs are discouraged from existing, because business is discouraged from existing. In essence, those who want to tax the successful more to pay for the unemployed and the poor create the very unemployment that they are "trying" to solve. 

In Hazlitt's own words: "But the larger the percentage of the national income taken by taxes the greater the deterrent to private production and employment. When the total tax burden grows beyond a bearable size, the problem of devising taxes that will not discourage and disrupt production becomes insoluble."

PBF REAL TALK TIME: 

Since this section was so short, lets do a quick thought experiment on this concept. 

Picture, if you will, two countries, separated from each other by the ocean (or at least parts of the same country separated by a large body of water). It is a long way for ships carrying goods from one country to get to the other, so they stop halfway, on a little island. 

Because traders, businessmen, and merchants from both countries stop on this island to rest, and even to trade their own goods, opportunity grows for the natives of the island to serve both nations, and they, in turn, share in a portion of the two countries' wealth, while not growing as rich as the other two countries. 

If the middle island's government decides that it is not fair that the other countries are still unequally richer, and decides to impose a tax upon the ships and traders from Countries A and B, and then decides to spend it to the benefit of the middle Island's inhabitants, at first, it may seem like a good thing. 

Unfortunately, the more the central Island taxes away the merchant ships and traders who stop by the island, the less it makes the sailors want to rest there. Eventually, if it becomes to expensive to stop by the island due to taxation, the traders and sailors will find a new island to rest, or even not rest at all. 

Not only is this an inconvenience for the sailors from Countries A and B, it eliminates the source of the free goodies that the central island's citizens enjoy that were being taken through taxation by the island's government. If no traders stop by the island because they fear that their income will be confiscated, the island's citizens will have fewer opportunities to find work serving the weary sailors, and fewer opportunities to buy the goods from Countries A and B that made them wealthy in the first place. In essence, the attempt to "tax the rich to pay for the poor" has made the poor even poorer. Sound familiar?

In closing for this chapter, just remember that just because somebody else is rich or has more than you, it doesn't mean that you are poor. Discouraging those that produce wealth for everybody is a good way to make you poor, when you lose out on all the production that others can create for you.