Taxation distorts incentives from "summary" of Capitalism and Freedom by Milton Friedman
The power to tax involves the power to destroy. The power to tax is the power to coerce and to control. Taxes are the price we pay for civilization, but they also have a dark side. Taxes can be used to influence behavior, to shape incentives, and to distort decision-making. When the government imposes taxes on certain activities or products, it changes the relative prices of goods and services. This, in turn, alters the incentives facing individuals and firms. For example, when the government taxes savings and investment at a higher rate than consumption, it discourages people from saving and investing. This, in turn, can slow down economic growth and reduce overall prosperity. Similarly, when the government imposes high taxes on labor income, it reduces the incentive for people to work and earn a living. This can lead to lower levels of productivity and job creation. Taxes can also distort incentives in other ways. For instance, when the government provides tax breaks or subsidies for certain industries or activities, it can encourage rent-seeking behavior and create inefficiencies in the economy. This can lead to resources being misallocated and markets becoming distorted. In addition, when the government uses taxes to redistribute income and wealth, it can create disincentives for people to work hard and take risks. In a free society, individuals should be free to make their own choices and pursue their own interests. Taxes should be used to raise revenue for essential government functions, not to shape behavior or manipulate outcomes. When taxes are used in this way, they can undermine individual freedom and harm economic efficiency. Taxation distorts incentives and interferes with the natural workings of the market. It is important to be mindful of the unintended consequences of taxation and to limit the use of taxes to only those purposes that are truly necessary for the common good.
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