Taxing the Rich Will Not Solve the Problem

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.

Conclusion.

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.

More from Mindful Money:

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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7 thoughts on “Taxing the Rich Will Not Solve the Problem”

  1. Anonymous says:

    Peter what you say has a high degree of validity. May just add one further point – it is not taxing the rich that is the problem, but closing the plethora of “legalised tax loopholes”. If time and energy could be spent in this area, I’m sure a lot more people would be happier.

  2. Anonymous says:

    There is a problem in that money is shifting from the poorer to the richer.   It is NOT being created by the richer, it is being moved.   The aim of taxation is to move some of  it back to public things like defence, education, transport, roads etc – all the silly things we need.

    1. Morgansit says:

      The article was originally a response to the below article by Peter Tatchell, in which he suggests a tax on the rich to solve all of the government debt problems. I decided not to link to this article in my article, because it was a more generic answer to many other articles than Peter Tatchell’s.

      http://www.petertatchell.net/social_justice/how-to-save-the-economy.htm

  3. John mccusker says:

    Utterly shameless. Like to declare an interest? I’ve read some self-serving stuff in my time, but this really takes the biscuit. Well, since we obviously can’t tax the rich, we’d better tax the poor instead. Job done! 

    1. Peter Morgan says:

      Please read the above comments where I explain the article was a direct response to Peter Tatchell’s article in which he suggests a tax of 20% on all assets of the wealthy.

  4. R Branch says:

    Some of the most mindless, oversimplified and self serving writing I have read on any financial blog – I’m surprised it was allowed to be posted. To suggest that “taxing the rich” would force “them” to sell off all their assets and depress the market, or to sell off all their shares would deprive granny of her pension is just risible. The vast majority of pensions funds are held by, er, funds, not rich individuals.
    The underlying, edwardian attitude to understanding of wealth in this article seems to assume that “the rich” generally spread their largesse in a benevolent attitude, spending their hard earned (or possibly fraudulantly bonus enriched) wealth on products and services that will put money into the pockets of local, forelock tugging artisans such as blacksmiths, village shop owners and Mrs Bun the Baker. What tosh! Just look at what merchant bankers and footballers spend their money on – big houses, Ferrari’s, opulent holidays, champagne. It’s human nature – its what anyone would do! Meanwhile, we have the grossest divegance between rich and poor and taxation policy, allied with socially aware distribution of this income, is a key way to redress this.
    So let’s not claim that taxing the rich will destroy the ability of their money to work to the benefit of society – the redistributed money will be spent at supermarkets and shops providing local jobs for local people, rather than at a Porsche dealership.

    Why not do some interesting financial journalism – analyse what a “rich” person spends their income on in a year, then get them to spend some time with a struggling family at the opposite end of the spectrum – and then justify themselves (or yourself). Alternatively, why not declare your support for US Reublicanism and the Tea Party?

    1. Peter Morgan says:

      If you read the above comments you will see that the article was a direct response to the article by Peter Tatchell claiming a tax on the wealthy would solve the economy problems in one go. The article is linked above.

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