188.8.131.52 Progressive Taxation: Higher Taxes on the Wealthy
Economic reciprocity requires everyone to pay tax in proportion to their wealth, but it does not justify the wealthy paying what Adam Smith called “something more than in that proportion” (3.5.1). There are, though, economic arguments for it:
- The rich are better able to afford tax payments.
- Some redistribution of wealth can be economically beneficial. Consumer demand is increased if wealth is shared more equally across society, because poorer people are more likely to spend their money immediately. This argument is explored more fully later (184.108.40.206).
Some people also feel that great financial inequality is morally wrong, and there are political (220.127.116.11) arguments for reducing it by increasing taxes on the wealthy.
There are several ways of levying more tax on those who are richer:
- Progressive taxation applies at a higher percentage to greater wealth of the type that is being taxed (18.104.22.168). For example, income taxes are usually progressive.
- A higher purchase tax can be levied on items that are not deemed to be basic necessities, or which would normally only be bought by the rich.
- Capital gains tax is not a problem for the poor.
- Tax on capital transfers, like the British ‘stamp duty’, only affects those who own property.
- Inheritance tax affects wealthy people more than poor people, particularly if there is a threshold below which it is not applied.
There are limits, though, on the extent to which it is possible to ‘soak the rich’. Tax revenues can be reduced if marginal tax rates are too high, as predicted by the Laffer curve (22.214.171.124). As illustrated in an Economist daily chart, Can countries lower taxes and raise revenues?, “The Laffer curve exists in principle, but the sweet spot is hard to find”.
The American tax code, though, is more complicated: the poor do not pay tax but some rich people pay less than those on middle incomes, as reported by the BBC: “Mitt Romney paid 14.1% in tax in 2011” while President Obama, whose income was only one seventeenth of Romney’s, paid 20.5%.
Progressive taxation of incomes does not prevent more successful people from being richer than those who are less successful, but it reduces the difference between them. There is still an incentive to work harder. Sadly, though, many extremely wealthy individuals and corporations resort to tax avoidance (126.96.36.199).
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