Why do higher taxes on the rich historically correlate to higher economic growth

[nevafuse]

I realize I'm preaching to the choir here - at least for the most part.  But in response to a hot topic on reddit, I figured I'd give non-socialists a chance to answer.  I honestly believe reddit is composed of intelligent people, but I completely disagree when it comes to politics - especially economic policy - on that site.

The main reasoning from the top comment is that the rich hoard their money preventing it from being re-circulated into the economy.  But wouldn't that decrease the supply & increase demand aka making your money worth more?  Assuming making your money worth more is a bad thing ("then everyone would hoard!"), why is giving it to the government a good thing?  Am I the only skeptic that believes the government is just a bunch of talking heads that give tax revenue to their rich friends?  And even if the government perfectly reallocated money, what would be the point of working?  If I'm getting money from not working...I'm not going to work.

So the big question, why have higher taxes on the rich historically correlated to higher economic growth?

Edit:

Here's the link to the reddit comments http://www.reddit.com/r/politics/comments/11ok1e/overall_higher_taxes_on_the_rich_historically

Here's a link to the data http://conceptualmath.org/philo/taxgrowth.htm

[TTBit]

Data please.

[ElectricMucus]

Because high taxes on the rich usually means overall less taxes.

The lower the overall taxes the higher economic growth, it's as simple as that. Some eastern European country had a flat-tax model a few years ago. The economy skyrocketed. However this meant less taxes for the rich (at least according to the socialists who changed it back)

[Etlase2]

The main reasoning from the top comment is that the rich hoard their money preventing it from being re-circulated into the economy.  But wouldn't that decrease the supply & increase demand aka making your money worth more?

Making money scarcer does not help the poor or middle classes. It causes high unemployment (and bankruptcies) due to price stickiness while the economy readjusts.

Assuming making your money worth more is a bad thing ("then everyone would hoard!"), why is giving it to the government a good thing?  Am I the only skeptic that believes the government is just a bunch of talking heads that give tax revenue to their rich friends?

I don't know what you're reading so I can't verify that the conclusion is that "giving to the government is a good thing", but all government spending eventually goes to the private sector. There is certainly a degree of crony capitalism involved, but what congress does with a budget is certainly public information, so there is only so much that they can get away with.

And even if the government perfectly reallocated money, what would be the point of working?  If I'm getting money from not working...I'm not going to work.

This is certainly not a valid conclusion. The government doesn't spend money for nothing, they expect work to be performed in return. It may be inefficient, and it may be liberty-depriving, but it (almost always) isn't a hand out.

[Lethos]

Because high taxes on the rich means overall less taxes.

The lower the overall taxes the higher economic growth, it's as simple as that.

EM brings up a fairly good point. If you tax the 1% (Richest) more, the 99% get to enjoy a tax break.
Of course it doesn't matter that much while loop holes exist, however yes taxing the rich more does work, without penalising the poor.
Economic growth is largely driven by the spending power of the 99%, so if you tax them less, they will have more money to spend.

Why does it help when governments have more money?
- Public sector jobs creation
- More Police, Paramedics, Fireman etc, makes it alot easier to keep crime numbers lower, making for a more peaceful society.
- Public funding, Benefit system, pensions etc.

Yeah I live in a country with a high tax rate and a government which does a lot in the public sector.
I don't like taxes, but I'd not trust the private sector to do a better job.

[nevafuse]

Because high taxes on the rich means overall less taxes.

The lower the overall taxes the higher economic growth, it's as simple as that.

taxing the rich more does work, without penalising the poor

If the rich work less because it isn't worth the money after tax, then it does penalize the poor.  That is less money for the rich to loan to the poor or to pay the poor to work for them.  There are consequences.

[ElectricMucus]

The thing is more like: In any sort of welfare state, (that's the main argument of why to have a state in the first place), why tax the poor at all?

In that case taxes should be negative and there could be other mechanism transposing the slope, like a disability, old age, kids, doing community service (anything falling under state employment for that matter).
When it comes down to it, if you are willing to strip down unnecessary bureaucracy what are now taxes could substitute any governmental mechanism involving money.

At best the thing would be tied to consumption, not income, property, profit or something else. Of course that would require a drastic change in the money system as well, which brings us back to bitcoin...

[Etlase2]

If the rich work less because it isn't worth the money after tax, then it does penalize the poor.  That is less money for the rich to loan to the poor or to pay the poor to work for them.  There are consequences.

The contrary argument is: the higher the tax on the rich, the more inclined they are to reduce their tax burden by employing more people.

Both are speculation, the argument I propose might seem to be backed up by the data.

[SgtSpike]

The thing is more like: In any sort of welfare state, (that's the main argument of why to have a state in the first place), why tax the poor at all?

In that case taxes should be negative and there could be other mechanism transposing the slope, like a disability, old age, kids, doing community service (anything falling under state employment for that matter).
When it comes down to it, if you are willing to strip down unnecessary bureaucracy what are now taxes could substitute any governmental mechanism involving money.

At best the thing would be tied to consumption, not income, property, profit or something else. Of course that would require a drastic change in the money system as well, which brings us back to bitcoin...

Negative taxes lessens the need/desire for people to work.  Disabled and old people, and kids, should all be taken care of by family members, relatives, friends, or charities.  They shouldn't be the responsibility of the taxpayer.

Why tax them?  Well, if they're using services that cost money, shouldn't they pay for those services just like everyone else?

If the rich work less because it isn't worth the money after tax, then it does penalize the poor.  That is less money for the rich to loan to the poor or to pay the poor to work for them.  There are consequences.

The contrary argument is: the higher the tax on the rich, the more inclined they are to reduce their tax burden by employing more people.

Both are speculation, the argument I propose might seem to be backed up by the data.

So you're saying the rich would rather lose 100% of their money by paying it to employees instead of losing 40% of it to taxes?  What kind of logic is there in that?

[ElectricMucus]

So you're saying the rich would rather lose 100% of their money by paying it to employees instead of losing 40% of it to taxes?  What kind of logic is there in that?

No, what I am saying is that taxes should only be charged on consumption.
As far as employing goes that would be consumption of a service.

[ElectricMucus]

The thing is more like: In any sort of welfare state, (that's the main argument of why to have a state in the first place), why tax the poor at all?

In that case taxes should be negative and there could be other mechanism transposing the slope, like a disability, old age, kids, doing community service (anything falling under state employment for that matter).
When it comes down to it, if you are willing to strip down unnecessary bureaucracy what are now taxes could substitute any governmental mechanism involving money.

At best the thing would be tied to consumption, not income, property, profit or something else. Of course that would require a drastic change in the money system as well, which brings us back to bitcoin...

Negative taxes lessens the need/desire for people to work.  Disabled and old people, and kids, should all be taken care of by family members, relatives, friends, or charities.  They shouldn't be the responsibility of the taxpayer.

Why tax them?  Well, if they're using services that cost money, shouldn't they pay for those services just like everyone else?

I was talking about the possibility of keeping the welfare state operating, which imo is possible, and desirable.


In the end a disabled person isn't paying for consumption one way or the other, except for the social-darvinistic approach where you let em die. I don't believe in the concept of charities and social support inside the family and friends only goes so far, there would still be cases where people end up with nothing.

[Etlase2]

So you're saying the rich would rather lose 100% of their money by paying it to employees instead of losing 40% of it to taxes?  What kind of logic is there in that?

I'm saying the benefit could easily outweigh the costs. If the choice is to expand the company or to cut costs at every turn, cost-cutting becomes less and less viable as a profitable measure the higher the tax is. And the tax would probably have to be higher than 40%, that is about what it is now in the US and most of europe. The US has had taxes in the 90s for a short period, as well as in the 50s and 60s for extended periods. The scary, untenable, uncapitalistic thought is that economies run better the more evenly that wealth is distributed. It makes a pretty logical form of sense when it is the 99% that move the economy.

[SgtSpike]

So you're saying the rich would rather lose 100% of their money by paying it to employees instead of losing 40% of it to taxes?  What kind of logic is there in that?

No, what I am saying is that taxes should only be charged on consumption.
As far as employing goes that would be consumption of a service.

Well that makes even less sense.  If you only had taxes on consumption, then the rich could keep 100% of a given pool of money by not hiring people, but would have to pay 140% of said pool if they hired people with it.

The thing is more like: In any sort of welfare state, (that's the main argument of why to have a state in the first place), why tax the poor at all?

In that case taxes should be negative and there could be other mechanism transposing the slope, like a disability, old age, kids, doing community service (anything falling under state employment for that matter).
When it comes down to it, if you are willing to strip down unnecessary bureaucracy what are now taxes could substitute any governmental mechanism involving money.

At best the thing would be tied to consumption, not income, property, profit or something else. Of course that would require a drastic change in the money system as well, which brings us back to bitcoin...

Negative taxes lessens the need/desire for people to work.  Disabled and old people, and kids, should all be taken care of by family members, relatives, friends, or charities.  They shouldn't be the responsibility of the taxpayer.

Why tax them?  Well, if they're using services that cost money, shouldn't they pay for those services just like everyone else?

I was talking about the possibility of keeping the welfare state operating, which imo is possible, and desirable.


In the end a disabled person isn't paying for consumption one way or the other, except for the social-darvinistic approach where you let em die. I don't believe in the concept of charities and social support inside the family and friends only goes so far, there would still be cases where people end up with nothing.

And in those cases where people end up with nothing, those people die off.  What's the big deal?

Regardless, we obviously have different ideas of how helping those who cannot help themselves should work, so we're not going to agree on that. 

So you're saying the rich would rather lose 100% of their money by paying it to employees instead of losing 40% of it to taxes?  What kind of logic is there in that?

I'm saying the benefit could easily outweigh the costs. If the choice is to expand the company or to cut costs at every turn, cost-cutting becomes less and less viable as a profitable measure the higher the tax is. And the tax would probably have to be higher than 40%, that is about what it is now in the US and most of europe. The US has had taxes in the 90s for a short period, as well as in the 50s and 60s for extended periods. The scary, untenable, uncapitalistic thought is that economies run better the more evenly that wealth is distributed. It makes a pretty logical form of sense when it is the 99% that move the economy.

On the contrary, people are already complaining about too many US jobs moving overseas.  With the modern globalization of the world's economy at this point, do you really think it is viable and smart for the US to alienate corporations with higher tax rates?  The higher the tax rates, the less incentive a company has to conduct business in the US, and it is a lot easier for a company to operate internationally based in a different country today than it was in the 50's and 60's.

I still don't quite understand why hiring people would be better than saving money, even at a 90% tax rate.  Surely a rich person would rather save 10% than 0%?  Or are you saying that hiring people would "expand the company," resulting in greater profitability down the road?  Even in that case though, it's essentially the same incentive.  Right now, it is invest 100% in new employees for 65% of future profits or take 65% now, but with a 90% tax rate, it would be invest 100% in new employees for 10% of future profits or take 10% now.  Where is the extra incentive to hire people if a higher tax rate is in play?

[ElectricMucus]

So you're saying the rich would rather lose 100% of their money by paying it to employees instead of losing 40% of it to taxes?  What kind of logic is there in that?

No, what I am saying is that taxes should only be charged on consumption.
As far as employing goes that would be consumption of a service.

Well that makes even less sense.  If you only had taxes on consumption, then the rich could keep 100% of a given pool of money by not hiring people, but would have to pay 140% of said pool if they hired people with it.

Exactly, that's the beauty of it, wealth is not affected as long as you don't spend it. And that case if your consumption is taxed at 40% you could only get 60% out of it.
But then for the system I am proposing 40% would be an extreme example. I don't think it would even get that high, but if it does it would still be less than most people currently pay, and even if they are not very wealthy, healthy, young, etc...

I was talking about the possibility of keeping the welfare state operating, which imo is possible, and desirable.


In the end a disabled person isn't paying for consumption one way or the other, except for the social-darvinistic approach where you let em die. I don't believe in the concept of charities and social support inside the family and friends only goes so far, there would still be cases where people end up with nothing.

And in those cases where people end up with nothing, those people die off.  What's the big deal?

Regardless, we obviously have different ideas of how helping those who cannot help themselves should work, so we're not going to agree on that.  

Well at least we can agree to disagree  

[Etlase2]

On the contrary, people are already complaining about too many US jobs moving overseas.  With the modern globalization of the world's economy at this point, do you really think it is viable and smart for the US to alienate corporations with higher tax rates?  The higher the tax rates, the less incentive a company has to conduct business in the US, and it is a lot easier for a company to operate internationally based in a different country today than it was in the 50's and 60's.

Arguably part of the reason for outsourcing is the need for lower pricing within the US where wages have not kept up with economic growth. And arguably the US does not maintain any kind of international dominance over any sectors other than financial, anymore. The simplest way to force companies to maintain a US presence with high taxes is tariffs.

I still don't quite understand why hiring people would be better than saving money, even at a 90% tax rate.  Surely a rich person would rather save 10% than 0%?  Or are you saying that hiring people would "expand the company," resulting in greater profitability down the road?  Even in that case though, it's essentially the same incentive.  Right now, it is invest 100% in new employees for 65% of future profits or take 65% now, but with a 90% tax rate, it would be invest 100% in new employees for 10% of future profits or take 10% now.  Where is the extra incentive to hire people if a higher tax rate is in play?

I was just making a potential argument to the contrary. I don't know why there is a correlation between higher taxation and economic growth, I was speculating, as I said.

[DannyHamilton]

Because high taxes on the rich means overall less taxes.

The lower the overall taxes the higher economic growth, it's as simple as that.

taxing the rich more does work, without penalising the poor

If the rich work less because it isn't worth the money after tax,

Unless the tax is greater than 100%, any increase in pre-tax income should still result in an increase in income after tax.

[SgtSpike]

Because high taxes on the rich means overall less taxes.

The lower the overall taxes the higher economic growth, it's as simple as that.

taxing the rich more does work, without penalising the poor

If the rich work less because it isn't worth the money after tax,

Unless the tax is greater than 100%, any increase in pre-tax income should still result in an increase in income after tax.

But you still must account for opportunity costs.

Would you work for $1/hr instead of $10/hr?  Probably not.  Why not?  Because your time is worth more than that.  That is your opportunity cost.

Would a rich person put in effort and risk investment to build a company from the ground up if they stand to lose 90% of any profits they manage to make?  Probably not nearly as often as they would do the same if they stood to only lose 35% of any profits they managed to make.

Now, I can agree that there is some disparity between the two examples, and rich people are going to continue chasing at least some profits no matter the tax rate, but it is only logical that any tax rate hike is going to be met with more conservative investing on the part of the wealthy.

[matthewh3]

And even if the government perfectly reallocated money, what would be the point of working?  If I'm getting money from not working...I'm not going to work.

Most people like to do things and cooperate.  The only people who just work for money are wage slaves.

[ElectricMucus]

And even if the government perfectly reallocated money, what would be the point of working?  If I'm getting money from not working...I'm not going to work.

Most people like to do things and cooperate.  The only people who just work for money are wage slaves.

Well, as far as classical libertarian ideology goes that is a good thing.
One of the many reason not to be a Libertarian. 

[Lethos]

Because high taxes on the rich means overall less taxes.

The lower the overall taxes the higher economic growth, it's as simple as that.

taxing the rich more does work, without penalising the poor

If the rich work less because it isn't worth the money after tax, then it does penalize the poor.  That is less money for the rich to loan to the poor or to pay the poor to work for them.  There are consequences.

Keep believing the party line all you want, it's what they want you to believe, that is why so many loop holes exist in the first place.
You really think any of the fortune 500 companies actually pay total taxes of 40, 30 or even 20%? No, they don't.
In the past 10 years, a good portion of those, have paid from total tax in single digits, to tax rebates, worth millions or even billions.
Doesn't sound like they are paying their fair share to me. Especially if they are suppose to be some of the most profitable companies in the world.

Fact is, the super rich, boast massive million or even billions of Net profits when it comes to pleasing their shareholders.
However, when it comes to taxing season, will find any way possible to make out they companies profits are low or obscured so can't be taxed or are owed a refund etc.

So no, when a company can make out business is booming, I don't see anything wrong with taxing them properly and getting rid of all these loop holes.