8th December 2011 by Peter J.R. Morgan
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.
The money they have in assets like property, cars and yachts?
In the same way the share price drops when shares are sold on mass, asset prices will fall when sold on mass too. If the wealthy sector of society were expected to sell off their assets to “pay off” the public deficit in one go, the price they would receive for the assets would fall dramatically. It would become a buyer’s market. Who would buy these assets anyway? If you are taxing all of the people who have the means to buy expensive assets, who will have the money needed to buy them? The situation is not simply a matter of the rich having assets worth X amount of money, but who has X amount of money to buy the assets from the rich? And more importantly do they want to buy them?
The money they have in cash?
Money held in cash could be taken in tax, however, even if the money is seemingly doing nothing, it is doing something. Money not used in the economy reduces the price of goods, which would otherwise increase demand pushing up prices. In short, money not spent prevents inflation, which makes the cost of goods higher. As inflation is currently high it would not be advisable to take this money and spend it. If this was done the price of goods would rise and would be counterproductive to reducing poverty, which I assume is the intention of the taxes.
There is one underlying principle in the above points. Money always does something. It is always being used to enable the functions an economy needs. By taxing the rich, all that is achieved is a transfer of wealth from the private sector to the public sector. Most economists would argue money in the private sector is “better” at increasing output and providing employment. It also has to be said, if the public sector has racked up this level of debt surely it is not effective at managing money? Taxing the rich is no different from cutting government expenditure. It will simply take money working in the economy out, to reduce the deficit. This action will have the same consequences to employment, investment and services that public sector cuts have.
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