Question

Many in society today consider the wealthy economic parasites because they don't spend their money (aka "hoard" it) and therefore should be taxed at very high, some say even 100%, levels. How would you refute this in terms of incentives, economic growth and even national prosperity?

Answer 1

Income taxes are backed by two principle arguments:

1. Benefits received and 2. ability to pay.

1. Benefits received: For example a rich person pays tax and his/her child gets education in a school nearby and also all facilities like clean water, roads, defense etc. However it is not clear as child may be enrolled in a school far away. Also defense and roads are enjoyed by those who do not pay.

2. Ability to pay: People who earn more should pay more as they are 'able' to do it. Poor will benefit out of it. All earning equal above a limit pay tax.

100% income taxed will not generate any tax revenue as suggested by Laffer. As shown in diagram below, As tax rate increases, tax revenue increases but beyond a certain tax rate it starts to decrease. at 0% and at 100 % revenue is zero.

People will evade tax if tax rates are higher. It will also inhibit enterprise and very few businesses will come up and economic growth will go down due to mass unemployment. Fiscal deficit will be high and credit rating of a country will also go down.