Taxing the Wealthy Promotes Economic Growth

Mark ThomaOne of the fiercely debated issues in the last presidential election was taxation of the wealthy, and Republican proposals similar to those Romney made when he ran against Obama — lowering or eliminating the taxes on capital gains, interest, dividends, and inheritances — will undoubtedly arise again. I expect Republicans will throw a few bones to the middle class in an attempt to get the support of this important constituency, but I also expect the thrust of the proposals to be the same old supply-side policies favoring the wealthy that we have seen in the past.

What I want to focus on, however, is the economic arguments that are made to support the ideological goal of low taxes. The main argument is that taxes cause distortions that lead us away from the best allocation of our resources, and this reduces economic growth. A particular type of distortion — that taxes reduce the reward from innovative, job creating, growth enhancing economic activity and this reduces the effort that the wealthy are willing to devote to it — is often at the forefront of these arguments…

Wealth gives some people advantages over others who are equally talented and meritorious, advantages they did nothing to deserve except having the right parents. The wealthy have access to better education, highly valuable social networks, more educational opportunities outside the classroom, and so on…

Wealth that is earned rather than inherited is more defensible; though there are legitimate questions about how much of this wealth is truly the result of an individual’s effort rather than from luck, the help of society, and political and economic power that distorts the flow of income. A meritocracy is undermined when workers are not paid what they are worth — when the income workers have earned through hard work is misdirected to those at the top. Hence, there are legitimate questions about how much of the income and wealth of those at the top should be reclaimed and redistributed through taxation…

It’s time to do away with the myth that taxing the wealthy always reduces our economic potential, a myth that serves the ideology of the right. A tax system that reduces inequality of the type that diminishes economic growth reclaims income that should have flowed to workers in the first place, and helps to move us toward the meritocracy that underlies our national identity and fuels our economic system is in our collective interest.

We should not allow ideological arguments dressed up as economic facts, arguments that serve wealthy interests but have little foundation, to deter us from pursuing what’s best for the vast majority of Americans.

—Mark Thoma
Taxing the Wealthy Promotes Economic Growth

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