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  • Mariana Trujillo

Taxing the Rich Creates More Poverty



Often, when politicians are trying to find ways to finance their populist programs they often resort to a couple of known routes. One of the most common “solutions” proposed is rising taxes on the rich. But have we found a way to finance social programs and distribute wealth through society or have we just founded an old proposition based on fallacies and misconceptions that creates inefficiency inside the economy?


First, one thing must be understood. What do rich people actually do with their money?


“Rich people can do three things with their money: consume, invest, or donate.

If they donate, they will be helping those in need. If they spend, they will be guaranteeing employment and income for those sectors that serve them. If they invest, he will be stimulating economic growth and generating jobs.“ [1]


No money is lost in the economy. If you save money, it will be made available for other people to borrow it through banks. If you invest it, you are creating jobs and progressing humanity with new inventions made to serve consumers. If you donate it, you will be helping out those in need.


Taxing this money will disrupt this distribution and centralize the power. Instead of having this money efficiently and voluntarily distributed within the economy, we will have this money coercively directed to areas that are more convenient to those in power.


“The Rich” are responsible for financing a huge chunk of all new startups and entrepreneur endeavor that push humanity forward and serve consumers. This is can be done directly, by directly investing in companies, or indirectly, either by saving their money and making it available for other people to borrow it through banks or by spending money and helping the economy.


When you increase taxes on the rich, you are making less money available to be invested in the economy. Even if this taxed money is reintroduced on the economy either by government spending or directly giving it out to consumers, you are distorting the economy by making money be on placed that it “shouldn’t be”.


“For example, suppose that the government taxes $1,000 away from private people who would have spent the money on jewels, and uses it to purchase paper for government offices. This induces a shift in demand away from jewels and toward paper, a decline in the price of jewels, and a flow of resources from the jewelry industry; conversely, paper prices will tend to increase, and resources will flow into the paper industry. Incomes will decline in the jewelry industry and rise in paper.”[2]


“The tax-and-expenditure process, therefore, will inevitably distort the allocation of productive factors, the types of goods produced, and the pattern of incomes, from what they would be on the free market. The larger the level of taxing and spending, i.e., the bigger the government budget, the greater the distortion will tend to be. And moreover, the larger the budget in relation to market activity, the greater the burden of government on the economy.” [2]


But what about corporations?


If you increase taxes on businesses, do you know who will pay for it? Yes, consumers. They will simply pass this cost to consumers and make them pay for this new added expense.


“Higher taxes are simply just passed on to consumers. And when you have many people and businesses involved in the production, transportation, and distribution of products, and they are all paying higher costs, the added costs built into the selling prices quickly begin to add up for the end consumer.” [3]


And since prices will be higher, consumers will have less money left to spend on other things. They will have less disposable income.


The same way that tax breaks and benefits for corporations and the wealthy will trickle down to everyone else, higher taxes will eventually trickle down to the middle class and the poor.

This remains true to all types of taxes and to all economic classes. If you tax the middle class less, it will trickle down (or up) to everyone else, including the poor and the rich.


“The best way to soak the rich is through low tax rates on work and investment, which create a prosperous economy with rising incomes for everyone.” [4]


References:


[1] https://www.mises.org.br/article/2740/quatro-consequencias-inesperadas-de-se-aumentar-os-impostos-sobre-os-mais-ricos


[2] https://mises.org/wire/how-government-spending-hurts-economy


[3] https://www.thoughtco.com/how-higher-taxes-for-the-rich-ultimately-hurt-the-poor-3303539


[4] https://www.heritage.org/budget-and-spending/commentary/sorry-mr-obama-heres-why-raising-taxes-the-rich-wont-work

Photo by Etienne Girardet on Unsplash

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