Higher tax rates boost the economy

Taxing capital is an essential part of developing a tax system that is fair and based on an individual’s ability to pay. The idea that any taxation of wealth inevitably impedes economic growth is both overly simplistic and challenged by many experts and economists. As Nobel Prize-winning economist Joseph Stiglitz notes, “Rising inequality implies falling aggregate demand, because those at the top of the wealth distribution tend to consume a smaller share of their income than those of more modest means.”77

Taxes to fund the government and improve distribution are not necessarily in conflict with economic growth—in fact, the government is integral to a better performing economy.78 In particular, recent research shows that taxing wealth is unlikely to hinder economic growth when the tax falls on economic rents or if revenues from a wealth tax are used to make social welfare-enhancing public investments, which may have a higher rate of return than private investments.79 Economic rents in recent decades have reached near-historic highs and have significantly contributed to wealth inequality in the United States. Meanwhile, government investments in education and infrastructure can provide a positive rate of return for the economy as a whole; at a minimum, these investments are essential to sustaining a robust economy in the long term.80

In fact, many studies have shown that highly concentrated wealth correlates with poor economic growth over the long term. In times of high concentration of wealth, taxing wealth may improve growth by breaking up unproductive capital, which is then free to be used more productively.81 Some economists cite the United States during the mid-20th century—when economic growth was high despite a more robust estate tax—as an example of this phenomenon.82