Do Tax Increases Affect the Jobs Industry?

It is well known, and largely understood as a result of the global financial crisis of 2008 – 09 and subsequent recession, that all parts of the economy and interlinked, with changes in one area having an influence on others, be it directly or indirectly.

To answer the question in the title in short, yes, tax increases do affect the jobs industry. However, it is important to understand the reasons, and also that the affects aren’t always the same. This final point is why tax increases are a point of debate for governments around the world. It is not merely a case of lowering or raising taxes for political reasons, but of finding the fine balance that will enable the economy to thrive.

When Tax Increases are Bad

Tax increases tend to have the biggest detrimental effect when they’re directly linked to the business in some way. For example, if there is an increase in business taxes or energy taxes businesses are likelier to look for savings than increased sales, which usually means redundancies.

If a tax increase means a company needs to pay more in order to provide real terms wage stability, they’ll usually choose to simply cut staff instead. This is the most general rule of all; if a tax increase means more money leaving the company, bosses aren’t going to stand by and let it happen.

The final major factor here is tax reductions and incentives, namely, if a tax cut was used to propel jobs growth and encourage firms to hire, what happens when the taxes go back up? What happens when incentives are removed is a big question in many walks of life. In terms of tax rises, it usually means jobs are lost.

When Tax Increases Don’t Matter

On the rare occasions when a company is running at optimum manpower levels and isn’t carrying extra staff unnecessarily, tax increases will often have no impact, as the company is able to increase productivity to meet the increased tax demand whether it’s a business tax or an employee tax.

The aftermath of the financial crisis saw many companies take a look at themselves and work to become leaner, meaning this scenario should become more common in the future.

When Tax Increases are good

Tax increases are usually only universally positive when the additional capital raised goes straight into creating infrastructure and other platforms that allow jobs to thrive. This is often, but not always, linked to government jobs and public services, although there will often be scrutiny of the figures involved to ensure that an announced initiative does happen and isn’t just a front for increased levels of taxation.

It is important to realise that increasing one tax to reduce another rarely works; ultimately, governments end up with the same levels of revenue and the negative reaction from parties burdened with increased tax liabilities is almost never cancelled out by the positive reaction from those who benefit from a cut. Such a move can also leave the economy in a state of flux, and there will never be sustained growth as job creation will be cancelled out by job losses within a continuous cycle.