Mindfu

I read an interesting article “Taxing the wealthy: Diving into the rich pool”.   The article is about how the United States and other countries are looking to their rich to tax in order to close their budget deficits and how this choice might not be the best one.

The “Buffet rule” is the reform followed by Obama.  Although even many rich agree that they ought to pay more in taxes.  The middle and lower classes also agree that the rich ought to pay more in order to shoulder a share of the burden of fixing the government finances, along with a widespread belief that they can be asked to do so without much harm.

History suggests that low taxes on the rich encourage investment and growth.  It also suggests that often, when tax rates increase the rich are likely to simply move, taking their money with them.  In the US as of 2007, earnings of the top 1% equalled 74% of all taxes paid.

Reagan, facing the stagnation of the 70s, touted tax cuts as a way to rescue the economy.  In Britain, Thatcher slashed the tax rates on the top marginal income from 83% to 40% from 1979 to 1988.  Canada, Germany, Norway, Russia and many other countries followed suit.  Corporate and capital incomes were later also liberated.

The current debate depends on whether these changes were for the good.  The more a government spends, the more it must tax.  Workers respond to the taxes and take steps to avoid taxation.  This can cause distortions in the functioning of the economy, reducing growth and the economy’s ability to provide a high standard of living to all.

When the rich change their behavior it can distort activity in economies.  The rich may alter their sources of income, change their business strategies or just pack up and ship out.

Imposing higher rates on the rich is not the free lunch that we are promised.  Low level increases in taxation lift revenues, but with a cost from short term growth and efficiency.  If the goal of governments is to close budget gaps, the evidence shows that reforms that close loopholes and broaden the tax base are a more efficient way to bring in more money than just raising taxes on the wealthy.

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