How does increasing taxes potentially impact economic growth?

Increasing taxes can slow down economic growth primarily because higher taxes typically reduce the disposable income available to consumers and businesses. When individuals have less money to spend, their consumption decreases, leading to lower overall demand for goods and services. This reduced demand can result in businesses experiencing lower revenues, which may prompt them to cut back on investments, hiring, and expansion plans.

Moreover, if businesses face higher tax obligations, they might be less inclined to invest in new projects or consider expanding operations. A decrease in business investment can hinder job creation and innovation, both of which are critical components of economic growth. Consequently, a cycle begins where slower growth leads to less confident consumer spending and business investment, further emphasizing the negative impact of increased taxes on economic activity.