September 30, 2011

Tell me again why we should tax the rich?

Probably no one has missed that many countries these days have too much debt. One way to pay back the debt of a country is to raise the taxes the citizens are paying each month. Some argue that only rich people should pay more taxes, while some argue that rich people should pay lower taxes. The reason why they should pay lower taxes is that the rich rather should invest their money in businesses and create jobs. But does that really work?

Some rich people agree that they should pay more taxes. One example is Warren Buffett, and wealthy people in Germany and France agree with him. Italy wants to tax those earning more than $300,000 and France wants to tax those making more than $500,000. But is this really the correct way to go?

History suggests that low taxes on the rich encourage investment and growth. Someone with a lot of money can easily move away to another country with lower taxes and the original country loses the lower taxes the rich used to pay since the rich now, after moving away, now pays 0 in the original country. Rich people already contribute with a lot of money to their countries - the top 10% of earners contribute about 33% of total tax revenues.

It is difficult to answer the question how tax changes affect long-term economic growth. The growth of a country is affected by many other factors as well. But research suggests that at low levels rate increases will lift revenue, but not without a cost in efficiency and short-term growth. An isolated tax increase of 1% reduces real GDP by 3%. Closing loopholes and broaden the tax base are better ways to bring in more money than higher taxes for the rich.

Source: The Economist