In America today, there is a constant conversation about taxing the rich. They’re arguments on both sides of the coin. As of right now, since taxes are based on percentages, wealthy citizens should not be required to pay higher taxes because they fairly earned their money and they should get to keep it. On the other hand, some people believe that wealthy people should pay more taxes because they already have plenty of money so it is nothing when they pay extra. People should be taxed on consumption, not on income. What I mean by this is, if you spend more, you pay more. A consumption tax, taxes people when they spend money. However, income tax taxes people on how much money they make.
When tax rates go up, it usually has a negative effect on the economy, since people have far less money to spend and invest. Larger tax changes do not always lead to larger economic effects. In general, it is impossible to predict the long-run economic effect of a tax change by looking at how much revenue it raises or loses. This is because the economic effects of a tax change are driven primarily by a change in the total cost of tax rates. The rich shouldn’t have to pay extremely high tax rates because they already take risks to invest which does supply jobs to people, and carry the load of taxes in America. For example, there are two people who run a lemonade stand, John who works two hours, and Jim who works four. They decide to make an improvement to the stand that will cost two dollars. When they are deciding how to pay for it, John says that Jim should pay 1. 40 cents while John would pay 60 cents. John comes to this conclusion because Jim has more money to contribute from working longer. This isn’t fair because they did the same work on the lemonade stand but the person who worked more is punished. The article states, “Further, this means that tax hikes often do not have the intended effect of raising more revenue. If high taxes slow down economic growth, the government ends up taxing a smaller amount of money at a higher rate. Sometimes, this means a tax hike actually leads to lower total revenues, but even in less extreme cases, tax hikes yield diminishing returns” (Andrew Vitell). This shows, that even though we can’t know exactly how the economy will be affected by these changes, we can assume a lot of what is going to happen by looking at past experiences. If people have extra money to spend, they most likely will, which in turn positively affects the economy.
Simply raising the top tax bracket would aggravate a well-recognized problem with the current tax system. For that reason, an increase in the top-bracket rate should, and almost certainly would, be combined with other measures. When you put money into a 401k or IRA, you are not taxed on the contribution (the seed), and you pay taxes on the seed AND the growth when you take the money out in retirement (the harvest). The theory being that you will have less income in retirement and be in a lower tax bracket on which to tax the distribution. For example, you contribute $2.00 to a pre-tax savings account and you don’t pay tax on the $2.00. Let’s assume that $2.00 grows to $5.00 by the time you retire, and you take the money out. You pay tax on the $5.00. Currently, the highest income 1 percent of all filers gain slightly more income from capital gains and dividends than they do from wages and salaries. The gap between tax rates on various forms of income is preposterous. The current system encourages people to go to considerable effort to convert more-highly-taxed wages and salaries into capital gains or dividends. The article states, “Increasing taxes for the wealthiest is socially divisive and encourages a class war situation where the poor and middle class begins to resent the rich, and the rich, who find themselves paying an increasing share of the tax bill, resent the poor and the middle class in return” (Paul Goodman). This proves that for society to remain functional and fair, the rules that make up the tax system can’t dramatically change without clear phase in plans in order for the systems to shift with changing policy.
All in all, taxes are a very controversial topic and people have very strong beliefs when it comes to the subject. Raising taxes has been historically proven to have a negative effect on the economy. Taxes laws need to stay consistent to ensure an operating economy and tax laws need to stay with what works. Tax at seed or tax at harvest, with clearly defined taxation for all income classes you enable tax systems can support the needed funding to help grow economic development in a fair way.