Economic crisis: Taxing the rich will not solve the problem

9th December 2011

I have recently read a number of articles stating the solution to the economic crisis is merely to tax the rich. However, I doubt it is that simple and it may in fact create more problems than it solves. I provide my justification below, by explaining the use of the money held by the "rich" and how this benefits the rest of the economy.

So what about:

The money they have in the bank?

Savings in banks provide investment into the economy, when banks lend the funds deposited. This lending enables businesses to borrow money to start up, pay staff and cover overheads. It also enables homebuyers to arrange mortgages and it works as short term credit for borrowers, when it is lent out through credit cards. This money provides a service when it is invested, by taxing the rich the money will be taken from banks, reducing their ability to lend in the future. This would do tremendous damage to the economy and labour market.

The money they have in shares?

Share ownership is another investment favoured by the rich. They receive dividends and potential increases in share value as incentive to buy shares. Although a huge amount of money is invested in shares, making the rich sell their shares to pay tax will have a negative impact on the economy. If shares were sold at the magnitude that would be required to pay off public sector debt, the share price would plummet. By owning shares on a huge scale, the rich provide an artificial value to share prices. This would no longer exist if they were forced to sell them on the level needed to balance the national debt. This would have a catastrophic effect on private sector pensions, which are largely funded by share investment. It could push thousands, perhaps millions of pensioners into poverty.

Read more…

More from Mindful Money:

Taking a holistic approach to financial planning

One nation under one tax: But it’s not the rich who should pay more, it’s the poor who should pay less

Taxing the rich – cure or curse for the economy? We ask a panel of experts

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