Should the rich the rich be taxed? Which is the most appropriate taxation rate for the rich? What happens when you tax the rich? These are some of the questions that form the basis of the heated global debate about the tax contribution of the rich. This ongoing discussion has intensified in recent years especially because of the increasing economic problems. Some people argue that the rich should be taxed and taxed heavily, insisting that wealthy people can easily afford to make large tax contributions. Some people, on the other hand, argue that taxing the wealthy and the top earners is counterproductive and imposing high taxation rates on them will worsen the economic situation instead of solving it.

Taking a stand on an issue such as this (which I am not doing in this article) requires one to have some basic understanding of how taxation works and the effects it has on different income classes and the economy as a whole. Imposing higher taxes on the rich affects the economy and income classes both positively and negatively. The following answers the question-What happens when you tax the rich?

The positive effects of taxing wealthy people more than poorer people include; increasing government revenue which would be beneficial to the government especially in rough economic times such as recession and depression. The reasoning behind higher taxation of the rich- progressive taxation- is that rich people are the ablest to afford higher tax hikes. Another benefit that can be observed from a progressive tax system is the reduction of wealth discrepancies. It reduces the gap between the rich and the poor which is important because large wealth discrepancies increase the risk of an economic crash and social instability such as political turmoil and crime.

Taxation of wealthy people is also justifiable on the grounds of morality. Raising tax money from the rich and redistributing it by aiding the poorer sections of a county’s population, can be deemed as a moral action. Taxing the rich helps to make an adjustment to income discrepancies that result from the ever-increasing income of the wealthy and the stagnant income of the middle and lower classes of the economy. It will also create and increase the funding that is directed to health, education, security and defense which will subsequently create economic growth.

Taxing the rich also has several downsides. First of all, it is a disincentive for investment and innovation because it affects the people who are most likely to invest. The more money an investor makes, the more he/she is taxed. The result of reduced investment and innovation is less business and subsequently high rate of unemployment and economic collapse. Taxing the rich makes it difficult for them to increase their levels of income generation. This forces them to leave their countries to find favorable tax heavens for them to do business and make a higher income. Talented business people and expertise are lost to other economies which isn’t healthy for a growing economy.

Progressive taxation is also socially divisive because it creates conflict between different income classes. The lower and middle classes start to resent the upper class and vice versa because they have different contributions to the tax bill. Tax evasion and noncompliance are also huge problems associated with higher taxation of the rich. When tax bills become a burden, it is natural for the taxpayer to default. This increases the total spending by revenues bodies in the enforcement of tax evasion and noncompliance regulations.

At first, the government tax collection increases significantly with increased taxation of the top earners. This sudden spike in overall revenue increases the incentive for inefficient expenditure, which is already a problem even before the rich are taxed higher. Higher taxation of the rich forces the wealthy to alter their investment, expenditure, and tax behaviors in an effort to find a way to reduce their tax spending which in turn leads to a very significant decrease in the real government revenue. The government supported programs become difficult to implement because of reduced funding. However, this happens over time gradually, and the effect is experienced after some years of implementing progressive taxation systems.

Adoption of progressive taxation programs where the rich contribute more to the tax bill has proven to be ineffective and risky even in the past. Past attempts by many countries to do this led to slow economic growth and stagnation. Individuals and business were also affected in equal proportion with high tax bills and reduced income levels. Such outcomes induced the wealthy population to engage in less socially productive activities simply to avoid taxes and as a result, stifling the wider economy.

Taxation of the rich and the top earners results in a series of different events which have both positive and negative outcomes. An evaluation of what happens when you tax the rich shows that taxing the wealthy people is a very delicate move which requires careful and informed implementation because it can be detrimental to the economy if done wrong. It has proven to be a risky and damaging endeavor in the past if done without modesty. With an understanding of the possible outcomes, strategies can be designed to make it possible to reap the benefits and also steer clear of the risks of taxing the rich.

Let the professionals at  The Law Offices of Bj Richardson  help you find the professional attorney to help you with your specific needs. We don’t handle every aspect of tax law, however, we can direct you to a  professional that can handle any area of tax law that we don’t handle.

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