29 April 2013
Taxing or Not Taxing the Rich
What is the most palpitating issue publicly discussed in the US now? Without doubt, it concerns US economy, its deteriorating position and the ways to cure it. Robert Reich, an American political economist and commentator, decided to put some skin in the game and published the article with unpretentious name “Why we must raise taxes on the rich”, where he suggests raising the tax on income of top earners as a catalyst of economic growth. Obviously, he misinterprets certain economic models, openly juggles with nicely sound stereotypes, and fails to investigate the roots of the economic problem.
At first glance, the fact that super rich ...view middle of the document...
Before an increase in marginal income tax rate his business focused on reinvesting more funds into business, but in the face of an increase in income tax rate from 40 percent to 50 percent he changed his tactics by scaling back his plans for expansion, thus reducing production and eliminating few jobs (Miller, 133). There is no need to say that it generated lower income for both, physician and the government.
It is brilliant that Reich notices disadvantages of imposing too high taxes on the income of the rich, such as “moving money to the Cayman Islands and other shelters” In this regards he proposes a strict regulation of drawing off American citizenship from those who avoid their obligations. Such a naive blindness prevents him from seeing that it is a natural consequence in a self-regulating economy that many of those earning high annual income would rationally try to avoid paying higher taxes by willingly moving to other countries giving up their citizenship, or putting their income in an abroad shelter. Establishing business in a country that has favorable economic conditions is a normal tendency nationwide. Thus, the tax base may decline in response to higher tax rates, generating lower tax revenues than was intended by the government. The point “350 billion translated into trillions over the next decade” is a myth that vanishes once the issue is closely investigated (Reich). And it was successfully done by the economist, Arthur Laffer, in 1974, who explained the relationship between tax rates and tax revenues with the help of a Laffer Curve (see fig. 1).
As it can be seen, total tax revenues initially rise, but eventually fall as the tax rate continues to increase after reaching some unspecified tax revenue-maximizing rate at the top of the curve.
Fig. 1. Laffer Curve (Miller, 284)
Also, in recent years several economists have studies that have shown that “each $1 tax cut brings about an increase in real GDP somewhere between $1.40 and $3.00” (Miller, 284) So we must discover the optimal tax rate, which is the lowest possible rate that will produce sufficient revenues to...