The article suggests that taxing the wealthy could do more
harm than good. Based on Pigou’s argument, it is largely believed that
redistribution can spur economic growth. It rests on the fact that poor
families would spend more if they had the means, and the rich would be able to
smooth consumption if they suddenly lost income.
However, in a series of studies which drew from huge
macroeconomic datasets, Pigou’s arguments on redistribution and economic growth
doesn’t hold true entirely. According to the study, there are people who live
on payslip to payslip and don’t have backup assets, and there are those that have
sizeable illiquid wealth but are cash strapped. So, when tax is decreased the
cash strapped rich increase spending more than the ones living on monthly payslips.
Therefore, tax increase doesn't have much benefit if targeted in terms of
income. Instead, the article suggests, taxes on the wealthy should be phased in
slowly so they can liquidate assets rather than cut spending.
So, the article basically confirms Pigou’s hunch that rich
will cut spending when taxes rise, but the cut is more than previously
expected. And the poor increase spending but not to the degree required for
economic growth. Therefore, taxes should be raised slowly so that the illiquid assets
of the rich which is their actual wealth can be taxed, and so that they don’t
cut spending. Do you think this would be an effective approach to tackle income
inequality and also achieve economic growth?
5 comments:
It makes sense to think that wealthy people have a large portion of their wealth stored in assets as opposed to cash laying around. When this is the case, a sudden tax increase will decrease their spending just as it would anybody else. A gradual increase in the taxes may be the best approach. An alternative may be to give a highly publicized warning far in advance so they have a chance to liquidate.
I also think it would also be good idea. A gradual increase allows everyone to accommodate for the necessary changes. Wealthy people are investing more in their assets. The fact the data showed different outcomes does not surprise me. I think it makes more sense.
Another problem could be that wealthier people may have more access to information which would impact their decision making (e.g. raising tax rates, changing interest rates). People with less wealth may not get that information and may be less sensitive to changes in general, which could explain why the rich are more reactive than the poor, not to mention the fact that poorer people have to spend a much higher percentage of their income just to get by.
I think the rich are rich for a reason. They know how to grow wealth without paying too much tax. So the tax rise would not benefit the economy so much.Instead personal finance should be mandatory in school to teach people to manage their money. As individual wealth grows, the economy would then grow
A slow increase in the taxes for the rich may be the most beneficial especially because if they continue spending as usual due to an addiction of lifestyle, more money may go into the market. A dollar always goes further for a poor person and the value is very different. I think that low income people who are struggling should have more money regardless of spending habits as long as they are positive. Overcoming a struggle may help more than anything.
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