How does raising taxes for the wealthy affect the economy?

Question

When democratic candidates like Barack Obama say that they want to decrease taxes for the middle and lower class and increase taxes for the wealthy, what does this increase in taxes do to our economy? How is it affected by this type of change?

Answer 1

It depends upon HOW the tax increase is implemented. The most direct mechanism would be through the personal income tax, whereby a new bracket could be added, or the brackets denoting a "wealthy" individual could be increased so that a person pays a higher marginal tax rate.

All else equal, an increase in tax payments is a decrease in spending elsewhere, so the economic effect is negative inasmuchas the person paying higher taxes buys (or invests) less than they would otherwise. Note, however, that individuals rarely pay an effective tax rate that is near the average marginal rates, as our tax system allows credits and deductions. There's a sense of fairness inherent to this: a person who makes $100,000 but has to support five children should not be taxed as heavily as one who makes $100,000 but has no children.

The practical application of such a swap (lower tax for lower and middle classes, higher taxes for upper class) is that it is often difficult to separate the wealthy from the middle class. For instance, a family making $80,000 who owned a home might only pay taxes on the first $60,000 due to write-offs, and thus avoid the highest tax bracket. A household making $80,000 but living in an apartment would pay higher taxes. The latter is in a higher marginal tax bracket than the former, but is one "wealthy" while the other is middle-class?

IMHO, taxes should be sufficient to cover government expenditures, and not a penny more. Assessing taxes for the purpose of redistributing income is a notion related to class warfare and really does nothing to build the economy.

Answer 2

Well, imagine that you are a person who is making one million dollars a year after taxes and every year you expect to be making a little bit more. You run a company that makes products or sells food or whatever. The government comes along and changes the taxes so that now you are making $900,000 a year after taxes. What would you do? Shrug your shoulders and say oh well? No, you would probably find ways to push your income up so that you are back to where you were. How do you do that? It is easy. Lay off some workers. Raise the price of your product. Cut back on the quality of your goods. Or all of the above. In the end, any tax increase that goes to the wealthy is passed on to the lower and middle class and not in a good way.

Lets reverse the situation. Lets say that you are wealthy and making that million and you are given a tax break and you now have $1.1 million. What do you do with the extra $100,000? Most business people would invest that money. Take the $100,000 and start a new business or launch something new within their business. That will result in new jobs. That situation is win-win.

The problem is that the government needs to learn how to use the money that it does get its hands on. The government needs to learn that it is a bad idea to spend more than you bring in. Promising to make the wealthy pay more in taxes is nothing more than pandering for votes and in the end that course of action will just make things worse.

Answer 3

It actually hurts the because it drags money OUT of the economy. Wealthy people simply move their money into slower growth vehicles sheltering themselves as much as possible from taxes. Incoming revenue to the treasury drops because the economy slows. Wealthy people already pay the majority of taxes BY FAR.

Answer 4

There's a saying in economics that savings = investment.

So people with money can afford to save money. They invest in tools like the stock market which drives investment in businesses and growth of the economy.

What Obama is trying to do is take savings / investment dollars away from the higher income people and distribute it to the masses. Most of the masses are so entrenched in debt their best choices are to either pay off debt or spend the money.

So really if amounts to less investment, more spending. Reaganomics already taught us you can't spend yourself out of a recession.

Or more appropriately, Obama is trying to buy votes. I think if you said "lets take a million dollars from Paris Hilton and give everyone in Indianapolis a dollar", Obama would be up 999,999 votes.

Answer 5

very bad for the economy, it will go into recession, food will become unavailable, the rich will move to Costa Rica, people will move to Mexico to find work

or else there will be little change

see the story about Warren Buffet's testomony