Wealth tax key to economic growth

Though most people naturally dislike inequality, it’s often argued that raising taxes on the rich will do more harm than good by damaging incentives and investment, thereby slowing economic growth and ultimately hurting us all. “Given five fat sheep and ninety-five thin, how [to] induce the ninety-five to resign to the five the richest pasture and shadiest corners?” the famous British philosopher R.H. Tawney once asked. He continued: “By convincing them, obviously, that, if they do not, they will die of rot, be eaten by wolves, and be deprived in the meantime of such pasture as they have. Nor, indeed, hitherto has it been difficult to convince them, for there is nothing which frightens thin sheep like the fear of being thinner.” But is it really true that high taxes — even very high ones — are detrimental to societal well-being? The last few years have witnessed an explosion of new evidence from economists, sociologists, political scientists and ecologists that suggests they’re not. Exaggerated concerns It’s accurate that high taxes on the wealthy bring real risks. But in general, the downsides are highly overblown. For instance, a common worry is that rich people will respond to high taxes by working less. But there’s essentially zero empirical support for this claim. In fact, there is now close to consensus among researchers that while the rich do frequently try to avoid taxes, they don’t do so by working less. The most serious potential cost of high taxes is the reduction of private investment. This is definitely possible. But the key point to keep in mind is that such a reduction is only half the picture. It’s wrong to think of taxes as simply reducing investment, because states do not simply collect taxes — they also spend them. Therefore it’s more accurate to regard taxes not as reducing investment but as rearranging it — from the private sector to the public. Whether this is a good or bad thing depends entirely on the details. In many cases, levying high taxes on the rich will mean money is no longer invested in foreign stock markets or spent on unproductive things like private jets and multiple mansions, but is rather spent on productivity-enhancing entities like schools, hospitals, roads, public research grants and so on. Indeed, critical research shows that, all things considered, high inequality actually tends to reduce an economy’s overall growth rate. The most sensible and cautious conclusion is that high taxes — very high taxes, in particular — could somewhat reduce economic growth, but these costs are likely to be only mild or moderate. What about the other side of the ledger? What are the social and economic benefits from high taxes and reduced inequality?