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Why the Wealthy Should Not Pay More Taxes

Reducing inequality has been a major focal talking point among many Americans. Several people have suggested that to reduce the gap between the rich and the poor, the rich must be taxed higher. Nonetheless, a proposal to raise taxes that wealthy Americans pay can be harder than it may seem. This is because wealth taxes have in the past been inundated by capital mobility. This paper will examine how wealth taxes adversely affects both the rich and the low income earners and why it should not be introduced in America. While it may be used to spread the wealth around, wealth tax will discourage investors who will move businesses to other tax friendly countries. Introducing wealth tax to Americans is just as harmful as punishing businesses for being successful and encouraging capital flight, tax evasion and avoidance; therefore, entrepreneur should be given tax incentives in order to create jobs and grow the economy.

Hard work should be valued

The path to prosperity we are told is through hard work. Why then would we be punishing a hard worker by introducing retaliatory taxes? Why should we not reward that hard working American entrepreneur by letting them reap the rewards of their hard work? Whatever rich Americans earn means that have really worked hard for it and it belongs to them and not to the government to redistribute it as it may deem fit. Even when the government imposes a flat tax where the rich and the low income earners pay the same amount of tax, it implies that the rich will inherently pay more tax based on their income. Nonetheless, it has been determined that the amount of tax paid by the rich is already ahead of their fair share. A research in 2015 revealed that the top 1 percent paid an astounding 43.6 percent of federal income tax although they only earned 16.5 percent of that income (Chris, n.p.). Almost half of all Americans meanwhile do not pay any federal tax. It is a high time that businesses owners and entrepreneurs are not penalized for being successful through punitive measures like overtaxing them.

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If people are subjected to higher taxes, then they will strive to evade them through dubious ways. According to Henderson (n.p), if the government increases marginal tax rate, then some people may opt to work less or look into ways through which they can avoid the taxes. One perfect example used by the rich is to buy a house on mortgage so that the additional interest can be deducted from the mortgage. People will always try to adjust to additional taxes by trying to dodge the system. Some people will evade higher taxes by overstating their deductions and expenses or by understating their income. Therefore an additional tax for the rich will actually result in a deadweight loss for the government. This is because legally, the tax system always gives high taxed people an incentive to do something that they would otherwise not have been granted at a lower tax rate.

Most economists have long opposed the issue of wealthy Americans paying more taxes. This is because they understand that people will always search loopholes to avoid paying high taxes. Economists like Art Laffer (Henderson, n.p.) have further deduced that raising tax rates, say by 30 percent will also raise tax revenues by less than 30 percent because people  will make necessary adjustments to avoid paying taxes. According to economist Paul Krugman, higher taxes reduces the incentive to work.

Makes no economic sense

The wealthy only constitute a small percentage of all Americans. Compelling them to bear an unwarranted burden of mainly funding the government is a moral issue. It is counterproductive to increases taxes but decimate job prospects for many Americans resulting in low revenue for the government. The wealthy Americans are mainly the business owners and entrepreneurs who create jobs for others and raising taxes on them will only create a deterrent for job creation. Usually, higher taxes discourage these wealthy Americans from expanding their businesses or even opening a business at all. Some of them rich people also opt to take their business overseas through globalization as they avoid higher taxes at home. This essentially takes American jobs overseas as local workers are not hired. This basically means that tax hikes may not necessarily have the intended purposes of raising more revenue. Higher taxes to the rich may slow down economic growth. This has the effect of the government taxing only a smaller number of people at very high rates but raising so little. This realizes lower tax revenues as may not have been intended.

Higher wealth taxes are anti-growth. This is according to O’Sullivan & McGuire (n.p.) who assert that taxing the rich more will likely lower investments in new businesses and human capital. The savings of rich people is mainly very active as they provide it to fuel long-term projects, develop unexploited potential or try in risk taking entrepreneurship. Although a higher wealth tax may not immediately cause the economy to topple, it will eventually make the American economy less competitive and less dynamic.

Already high current tax rates

When the federal corporate income tax was high at 35 percent, only a few countries like Puerto Rico, UAE and Comoros matched that or had a higher tax rate than the US. A Congressional Act reduced the tax rate to 21 percent in 2018 and the US now matches countries like the UK at 25 percent, Canada at 28 percent and China at 28 percent (Chris, n.p.). With a high corporation tax, it means that other countries have a competitive advantage of attracting investors over the US. The US does not stand to attract businesses when its taxes are very high. This simply means that when the taxes are higher, investors are likely to move their businesses overseas. This has a negative effect on the US economy as jobs and resulting tax revenue moves overseas.

The same sentiments are also shared by O’Sullivan & McGuire (n.p) who note that wealth tax has failed in most nations across the world. For example, 12 member countries Organization for Economic Cooperation and Development (OECD) had imposed wealth taxes in the 1990s. But the number drastically fell to only four countries by 2017 (Gale & Samwick, pp.11). Other countries like Cyprus or Italy that tried to impose the wealthy tax also found out that it actually does not work. So why could the government impose a tax that has been proven not to work? The lessons from the countries above on wealth taxes should make the US government ponder with its policymakers.

Increasing wealthy taxes will not solve income inequality

Wealth taxes encourage tax evasion, avoidance and capital flight with evidence further indicating that countries that imposed wealth tax only managed to raise little revenue for a short period of time (Thoma, n.p.). Higher wealth taxes will not result in a trickledown effect that will spur growth among the lowest earners. Raising taxes for the rich will only magnify the unemployment problem. This negates the whole idea and hence no need for high taxes for the rich.

Wealth taxes will see the wealth moving into other countries to avoid tax increases

As seen from above, when tax for the rich is raised, they will opt to move to other countries that are “tax friendly. ” According to Thomas (n.p.), the wealth people are known to exploit tax advantages and if overtaxed, they may move their businesses to other states or countries that do not have punitive taxes. This means that the American economy will suffer instead from the lost jobs and capital investment.

Less money will be donated to charities

There is evidence to suggest that tax increases on the wealth will cause a reduction of their charitable funds. According to Thoma (n.p.), when the rich are heavily taxed, they donate less funds to charities. The charity funds are crucial in carrying out research in schools, laboratories, helping the poor.

Counter Arguments

On the other hand, some arguments on why the rich should be taxed more also remain valid. For example, the case of taxing the wealth to pay for some programs enjoyed by all Americans including national defense or infrastructure makes economic sense. Money allocated to national programs like food stamps or healthcare is redistributed into the economy. This has an effect of stimulating growth. According to history, when President Clinton increased the marginal tax rate to 39.6 from 31 percent, the economy grew with the GDP recording an average growth of about 4 percent in his second term in office. His successor President Bush introduced tax cuts that were meant to increases growth (Gale & Samwick, pp.5). However,   growth stagnated and finally succumbed into recession.

Taxing the wealthy is about being fair. While the rich are becoming richer, the poor are becoming poorer bringing into the fore economic inequality in the US. Statistics indicate that America’s top 1 percent population control about 40 percent of the country’s wealth. The combined wealth of the country’s three richest people have more wealth than about half of the country’s bottom half. More Americans are living in poverty. It is estimated that about half a million people are homeless (Chris, n.p.). It is only fair that the very rich are taxed in order to spread the wealth to the very poor. Provision of housing, healthcare and even education is provided by the government and taxing the wealth is only a moral issue (Hatgioannides, et al., n.p.). The trickledown effect may be felt by the low earners thereby helping the poor directly.

The tax rate for wealth Americans is currently very low and hence the need to increase it and ensure rich people pays their fair share of wealth (Chris, n.p.). Proponents for such an argument insist that a new tax bill that was signed by President Obama in 2018 lowered corporate tax rates. Massive tax cuts may result in increasing of the nation’s debt like it was during President Ronald Reagan’s tax cuts in the 1980s. The opponents therefore assert that the government should not offer tax cuts as it is likely to increase the nation’s debt but instead introduce wealth tax to boost economic growth as the recession beckons.

Conclusion

Introducing wealth tax in the United States is not a new idea. The tax might boost revenues for the taxman in the short-term but it could certainly encounter a number if challenges and negative consequences to the country’s overall economy. EOCD members discovered that punitive taxes on the rich undermined economic growth but encouraged capital flight. Instead of taxing the rich more to raise capital income, the government through its policymakers should rethink a better approach of taxing capital. Wealth tax stifles savings and investments which would otherwise help expand the economy thereby creating jobs.  Increasing tax for the wealth is seen as wrong government policy because it is bound to hurt both the rich and the low income earners as it depresses economic growth. In contrast, those who favor higher taxes argue that it makes economic sense and see good worth in spreading wealth especially to the very poor.

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