Opinions on whether the rich should pay higher taxes

Opinions on whether the rich should pay higher taxes

Debate on taxation has been centred on the extent to which the rich should be taxed higher than the poor. While this may be the conventional thought across the world, objections have been raised with the argument that such policies tend to punish hard work. In the USA, it is said that 70% of the taxes is paid by the top 10% income earners (Hargreaves, 2013). This is illustrated in the figure below.  

Source: Hargreaves, 2013

The trend is also the same in the UK where the 2010 figures indicate that the government imposed a 50% tax on incomes that were above £150 000; starting from April 2010 (Steenekamp, 2012).  This form of taxation is known as the progressive taxation system where higher taxation rates are imposed on higher incomes. While the approach to taxation facilitates raising crucial government revenues and ensure redistribution of wealth, critics argue that it can discourage investment hence not good for national economies.

Arguments in favour of progressive taxation system are based on the need to promote social sustainability where the poor are helped to access food and essential services. In many of the cases, the cost of services such as healthcare can be prohibitive. The cost of schemes such as insurance can also be beyond the reach of many of the poor who may in addition to lacking food be unable to cloth and shelter themselves within the acceptable standards of living. Such inequalities are believed to be detrimental to the society and it imposes a duty to the rich to sustain the poorer members of the society. In fact, many hold that since the rich receive much from the society, it is natural that much is expected of them.

The rich are also believed to have devised means through which they can evade taxation (Gruber and Saez, 2002). They tend to have numerous sources of income which range from salaries, dividends, and other forms of income. They are believed to utilise this diversity to shift their incomes into forms that are less taxable (Gruber and Saez, 2002). This prompts governments to raise taxes in order to ensure that the rich play their part in shouldering the cost of government. There are however views that higher taxation for the rich can be detrimental.

There is a school of thought that holds that private investors are more efficient in allocating resources. They are therefore better placed to invest and create jobs. Rodgers (2013) illustrates how government kills job by making an example of a scenario where a private investor can reinvest money to create 65 jobs as compared to the 1 or 2 jobs that government could create. While this argument may be valid, it is important to note that governments have a mandate that surpasses profitability. This means that while the investor’s main instinct is to invest in areas of highest returns, the government is duty-bound to invest even in fields that may not provide high returns (Steenekamp, 2012). This is part of the reason why governments may not be very good in creating jobs. However, all government expenditure can be justified based on the overall duty that they have to create and maintain a socially sustainable society.

Progressive taxation has also been blamed for seemingly encouraging laziness and punishing the wealthy. While it may appear aimed to fight inequality, the taxation system is in itself a manifestation of inequality. The rich are forced to work harder to shoulder the weight of government than the rest of the society (Rodgers, 2013). This can send the wrong message to the population which would otherwise see entrepreneurship and hard work as the ideal way of growing their national economies. Even though this argument may sound sensible, proponents of progressive taxation state that the wealthy would find greater rewards for their hard work if more income is spent on the poor through taxation. By facilitating cheaper shelter and essential services, government helps in boosting the spending power of the population (Steenekamp, 2012). This in turn leads to higher demand for their products hence leading to greater profitability of their businesses. Besides, the greater responsibility taken up by the wealthy fosters better relationship with government prompting favourable policies in times of crisis. For instance, the financial crisis was dominated by government initiatives that have been heavily criticised for being in favour of the rich and protecting them despite their misdeeds that caused the crisis in the first place.

The rationale for implementing the progressive taxation scheme is based on the need to support the poor and ensure that the society is socially sustainable. There have however been objections based on the fact that investors are more effective in investing in profitable ventures. Despite the apparent validity of this and other arguments against progressive taxation, it is important to note that this form of taxation is necessary. The sacrifice made by the rich is lower than the cost that society would have to pay if there were no efforts to support the poor. The rich should therefore pay higher taxes than the poor.

References

Gruber, J., Saez, E., 2002. The elasticity of taxable income: evidence and implications, Journal of Public Economics, 84, pp. 1–32

Hargreaves, S., 2013. The rich pay majority of U.S income taxes. (Online) Available at: http://money.cnn.com/2013/03/12/news/economy/rich-taxes/index.html (Accessed 8 October 2013)

Rodgers, T.J., 2013. T.J. Rodgers: Targeting the Wealthy Kills Jobs, (Online) Available at: http://online.wsj.com/article/SB10001424127887324110404578630461045403872.html (Accessed 8 October 2013)

Steenekamp, T.J., 2012. Taxing the rich at higher rates in South Africa? South African Business Review, 16(3), pp. 1-29