The political Left has a tough time with economics, especially the economics of taxation. Specifically, they’ve put forth all kinds of proposals to “tax the rich,” as they like to put it, and believe only the rich will pay. But that’s not how taxes work.
When politicians put forth ideas like imposing a “wealth tax,” higher income tax rates on upper income earners and an increased estate tax, the effects of such taxes spread far and wide throughout the economy.
Resources are drained from the private sector, where they would have been used for investing, saving, consumption and charity, while being subject to competition and consumer sovereignty; and handed over to the government, where resources would be reallocated according to political incentives, such as rent seeking, special-interest lobbying and the waste commensurate with government spending other people’s money.
The second major point is incentives are altered in a negative way. With a wealth tax, higher income and death taxes, incentives are reduced for productive economic undertakings, namely, the risk-taking activities of entrepreneurship and investing critical for economic, income and employment growth.
Let’s zero in on the workings of the market in a couple of areas.
First, entrepreneurs looking to build their businesses need financial capital. After tapping into their own funds and seeking investments from family and friends, they turn to the marketplace. Angel investment is a vital source of funding for startups and early-stages businesses, while venture capital plays a major role in funding high-growth firms with the eventual goal of hitting the public markets.
Angel and venture capital investors overwhelmingly are wealthy individuals who’ve succeeded in assorted businesses and industries. They’ve accumulated the financial capital necessary for making investments in new and growing businesses. Such investment is vital to the economy, and therefore, wealth taxes, death taxes and high income taxes undermine the growth in the economy, incomes and jobs we all wish to see and from which we all benefit.
What about charity work? A recent Gallup poll showed that nearly all upper income investors donate to private charities. Specifically, Gallup reported
97 percent of upper income investors in the United States say they donated money to charitable organizations in the past year. The group interviewed were individuals with annual household incomes of at least $240,000. As Gallup pointed out, “These investors are equivalent to the top 5 percent of U.S. households nationwide.” These are the individuals targeted by efforts to increase income taxes and inflict wealth taxes. It’s inevitable that charities will suffer when major donors have fewer dollars left after taxes to donate.
Make no mistake: Taxes on the wealthy in no way only affect the wealthy. Instead, the negatives of higher taxes on upper income earners are felt throughout the economy. To sum up, if you’re pro-entrepreneur, pro-small business and pro-charity, you can’t favor higher taxes on upper income individuals.