Advancing a Free Society

Why You Want the Rich to Spend

Thursday, October 6, 2011

Since April 2010, Britain’s high earners have faced a “temporary” tax on incomes above £150,000 (about $230,000) of 50 percent. This tax has cross-party support. Many blame the rich for the recession and the painful adjustments we now face.

The effects of this tax increase will be uncertain for some time, but other evidence suggests this tax will have worsened, not eased, our predicament.

A classic study by Martin Feldstein shows that higher tax rates change personal behavior. When the marginal rate goes up, taxpayers reduce their taxable income. By how much is debatable, but it is significant. Those that are not high earners are often unimpressed by this. But nearly everyone must work for, buy from, or sell to corporations led by high earners. We are all left worse off when their motivation to succeed is depressed.

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