Taxes are essential for the economic development of a nation and inequality reduction, especially in the contemporary capitalist global economy. Payment of taxes, which is delineated by tax rates, is deemed a mandatory obligation of any individual in society as it is the only way a government can function. Besides individuals, taxes are also imposed on corporates and other legal personalities that are used to generate income for businesspeople. Tax rates are essential in the calculation of both national income and gross domestic product (GDP) – factors that are essential in economics. National tax rates have a massive influence on economic growth and inequality levels and affect the operations of multinational corporations and the global economy.
Taxes and Tax Rates
Taxes are the main source of government income and are essential for the smooth operation of all its divergent activities. Government operations, such as the provision of security and healthcare, are quite expensive to bankroll. Thus, taxes are imposed on individuals, corporations, and goods. Tax rates are the quotas that delineate the percentage, rate, or ratio at which an individual or entity is taxed (Hungerford 7). Tax rates have to be based on legal enactments and are created and supported through government policies and laws. Apart from coordinating the raising of government revenue, tax rates also minimize tax injustice issues, which normally arise when taxes are imposed on individuals without a laid-out taxation framework. Tax rates provide a proper regulatory taxation framework upon which a tax system can operate efficiently.
In contemporary economics, the issue of tax rates comes into consideration when the concepts of progressive and regressive tax systems come into play. In a progressive tax system, the tax rate directly increases upon an increase in the taxable amount (Hungerford 7).There is a direct relationship between an increase in taxes and a rise in the taxable amount in a progressive tax system. Under a progressive tax system, individuals with low income only get to pay a small percentage of their total income compared to the rich (Hungerford 8). A regressive tax system is the diametrical opposite of the progressive tax system. Under the regressive tax system, the average tax burden imposed on taxpayers reduces as their total income increases. The regressive tax system is based on an inverse relationship between people’s income and the taxes they are supposed to pay. In a regressive tax system, the rich end up paying quite little taxes compared to the middle and working class.
Top Tax Rates
The modern field of economics is deeply concerned with the issue of top tax rates and how they influence economic growth in contemporary society. Top tax rates are the percentages by which the economic elite, the rich and superrich, are taxed in any given country. For example, according to the United States national income data of 2019, the average income of Americans is estimated to be $75, 000 (Saez and Zucman 37). However, this is a far cry from reality as the average member of the American middle class earns $18, 500 annually while the upper-middle class earns an average of $220, 000 per year (Saez and Zucman 38). The rich and super-rich in America, who form a mere 1% of the total American population, earn an average of $ 1.5 million annually (Saez and Zucman 38). In America, for example, the top tax rates are imposed on the rich and superrich – the 1% who own more wealth than 50% of the entire American population.
The top tax rate issue is a controversial concept in the fields of taxation and economics in America and the entire world. Economists, scholars, and financial experts hold divergent opinions concerning the taxation of the superrich. The majority of individuals in society backed by opponents of the supply-side theory of economics hold that both the rich and the superrich should be heavily taxed by having their tax rates increased (Berisha 727). The super-rich, on the other hand, who, regardless of constituting just 1% of the entire American populace, hold massive power and influence and largely control government operations and policies. They mostly use their economic prowess to gain political power and influence, which they use to advocate for the reduction of top tax rates in the country (Berisha726). The rich are joined by proponents of the supply-side theory of economics in the fight for the reduction of top tax rates. In America, the issue of top tax rates is a matter of public concern, which inundates every presidential election.
Impact on the Economy
High top tax rates and increased taxation on the rich is fundamental for economic growth. Massive taxation of the rich results in the channeling of more income and wealth to the majority of the population and this frees more capital for investment. Investment of capital results in faster economic growth as the surplus is re-invested back into the national economy. A constantly growing economy offers the best opportunity of increasing a nation’s savings and investments (Molander44). Economist, Gareth Myles, argues that due to low top tax rates, characterized by tax cuts to the rich, the personal saving rate in America has reduced massively from 11% of national income in the early 1980s to 2.5% in late 2017 (Berisha 726). This implies that there is a direct relationship between an increase in middle-class income and savings. Supply-side economics holds that the rich should be granted tax breaks as they save more and increase the amount of capital for investment (Berisha 727). This notion is refuted by economist Hungerford, who argues that whatever income the limited number of the superrich save is quite limited compared to the amount borrowed by the government. This ends up leading to the creation of deficits that undermine national economic growth.
Heightened taxation of the rich increases the aggregate demand for basic goods, which is a key driver of economic growth. The concentration of massive amounts of income into the hands of a few economic elite results in the reduction of the aggregate demand for basic goods as the rich tend to develop a higher inclination for luxury goods. The superrich are more likely to fritter their extravagant amounts of income on luxuries than to invest (Saez and Zucman 54). This explains the fixation of the contemporary world with luxury goods and services. The shift from widespread goods to luxury goods results in a general decline of demand and, with it, reductions in investments and economic growth (Saez and Zucman 57). The high inclination towards luxury goods also negatively impacts savings as money is spent on unnecessary items, limiting investments.
High top tax rates preserve the capitalist economy from failure and safeguards and guarantees long-term economic growth. The capitalist economy is characterized by a laissez-faire system in which government regulations are minimized, and the market forces of supply and demand are left uninterrupted. The capitalist system eventually falls short of the perfect market competition and has to be reined in to prevent the total collapse of the economy (Myles148). Through the accumulation of wealth, the capitalist market will always award the wealthy at the disadvantage of the poor, and this market is doomed to failure due to gross inequality (Myles 148). Thus, a high top taxation rate comes in to prevent the market from collapse, by fairlyredistributing the wealth of the economy from the hands of a few in which it is accumulated. This way, the market is saved from collapse, and long-term economic growth is guaranteed.
Impact on Economic Inequality
Massive taxation of the rich is an efficient tool in the fight against economic inequality. Economic inequality is a huge challenge not only in America but also in the entire world.Economic inequality, together with poverty, is classified as challenges to global peace by the United Nations (Molander 46). Economic inequality is a direct result of the capitalist economic system that emphasizes the accumulation of wealth into the hands of the few at the expense of the majority. High taxation of the rich and superrich in societyresults in the even distribution of income and reduces inequality levels. According to economists Avner Offer and Gabriel Soderberg, immediately after World War II, inequality in both America and advanced European nationsfell to its lowest levels since the 1500s due to massive taxation of the superrich (Hungerford 24). Therefore, economic equality goes in tandem with the massive taxation of the economic elite who own more than half of the total wealth of the world.
Economic equality goes hand in hand with economic growth, which is also tied to high taxation of the superrich. High taxation of the economic elite results in widespread distribution of wealth to the majority of the people, and this generates more capital for investments andfosters economic growth. This is because there is a declining marginal propensity to consume as individuals receive and possess more income and wealth (Hungerford 26). The supply-side theory of economics, which promotes economic inequality, results in reduced capital formation and limits investments (Berisha 729). Massive economic inequality also results in a massive decline in the rate of productivity growth, which negatively affects returns on capital invested. Moreover, glaring inequality affects the stability of the market and is a huge threat not only to economic growth but also to the existence of the capitalist politico-economic system in general. This explains the massive inclination towards socialism by individuals and nations that are plagued by massive economic inequalities.
Higher taxation of the superrich reduces inequality by eliminating the unfair and inefficient bargaining situations upon which it is based. In a capitalist society, unregulated by high top tax rates, the superrich, due to their innumerable wealth, gains an unfair advantage, which they use to oppress the economically disadvantaged. Thus higher taxation of the superrich limit the excess wealth accumulated in the hands of a few for benefit of the entire society (Fairfield and De Luis 123). The wealthy in society gain more from bilateral negotiations than poor individuals. If the rich get any wealthier from a round of bargaining by any chance, no framework can keep the outcome within reasonable bounds (Berisha731). Therefore, to ensure that the rich do not exploit the poor through unfair bargaining situations, governments should increase the tax rates of the superrich individuals. This way, a more egalitarian society is created, where each individual’s voice and opinion are deemed equal.
Tax rates also form part of corporate tax systems as they determine the amount of taxes to be paid by companies and other legal body corporates. The rich in society own or invest massively in huge companies or multinational corporations, mostly through stocks (Furman 37). In the past, national governments have resorted to enacting high corporate tax rates, especially those targeting multinational companies. The high tax rates on multinational companies are largely informed by the need to protect infant domestic industries that cannot fairly compete with huge multinationals. Since the operations of multinational corporations are not limited to certain territorial boundaries, the issue of high corporate taxes is quite controversial in international commerce (Saez and Zucman 76). The superrich, who own multinational companies, have also exploited the various legal loopholes that exist in the grey area between national and international commerce to evade paying taxes.
Multinational corporations in America are only subjected to corporate tax, and this enables the majority of their shareholders to evade paying domestic personal tax. Most multinational companies, such as Facebook and Google, make billions of dollars annually from their operations. These huge financial profits are divided among their shareholders who, even though they are among the wealthiest in the world, are the least taxed (Saez and Zucman 78; Furman 62). Economists Saez and Zucman, using Facebook’s example, hold that even though Mark Zuckerberg, Facebook’s founder and CEO, is one of the richest individuals in the world, he pays close to nothing in terms of taxes (78). This is mainly because he receives all of his income in forms of shares in the company, which is not subject to the personal income tax under America’s taxation system.
Multinational companies are further finding ways to dodge paying high corporate tax rates through profit shifting. The superrich who own most of the multinational companies, employ highly qualified tax lawyers who enable their companies to evade paying high corporate taxes in countries such as America, through profit shifting (Saez and Zucman 79). Profit shifting involves the transfer of a company’s headquarters or financial operations from a jurisdiction with high corporate taxes to those that charge low taxes, commonly known as tax heavens (Saez and Zucman 79). Through profit shifting, companies save billions of dollars in taxes, which only enriches their owners. For example, in 2003, a year before going public, Google transferred the bulk of its operations to a subsidiary in Bermuda. This ploy has enabled Google to make massive amounts of money with the company’s holdings in Bermuda, making $22.7 billion in 2017 alone – money that is not subject to the American taxation regulations (Saez and Zucman 82). The lucrative nature of profit sharing has made it the contemporary trend in corporate tax evasion and a big blow to the goal of massive taxation of the rich.
Tax rates are central to any nation’s taxation systems as they provide a regulatory framework for tax collection and imposition of taxes on both individuals and companies. High top tax rates target the rich and the superrichand are mainly concerned with the uniform distribution of wealth and income. Therefore, high top tax rates safeguard economic growth while limiting economic inequalities, which is a huge challenge not only in America but also in the world. In the corporate world, multinational companies have come up with mechanisms, such as profit sharing, which enables them to evade paying high corporate taxes. This defeats the aim of high top tax systems as profit-sharing results in the accumulation of more wealth in the hands of a few.
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Fairfield, Tasha, and Michel Jorratt De Luis. “Top Income Shares, Business Profits, and Effective Tax Rates in Contemporary Chile.” Review of Income and Wealth 62 (2016): S120-S144.
Furman, Jason. “Prepared Testimony for the Hearing “The Disappearing Corporate Income Tax”.” (2020). https://docs.house.gov/meetings/WM/WM00/20200211/110494/HHRG-116-WM00-Wstate-FurmanJ-20200211.pdf
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