On Wednesday, the Adam Smith Institute posted that the singer, Adele, joined the argument for low-taxes. The broad argument that the ASI gives is that high taxes stifle growth as owners of such wealth decide they want to vacate the tax authority – victims of the Laffer curve, so to say. There’s also the argument that, despite the high taxes, the return for the taxes is not in correlation to the tax.
There are lots of people out there who wonder why they have to cough up so much of the money they earn just to pay for late trains and bad schools.
As Keynesians, we are going to suggest something not all the different. However, the motivation behind it will be different. Where the ASI is arguing for a tax cut because it limits personal freedom, we will be arguing for a tax cut because it will drive demand.
The accumulation of wealth creates and sustains unemployment because the it is not used for anything in the economy and takes away from capital investment. It is also to blame for a reduction in innovation and enterprise due to the lack of investment.
This accumulation of wealth was abhorrent to Keynes:
The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will be recognized for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.
The accumulation of wealth, then is immoral as well as economically damaging.
The purpose of Keynesian economics is to drive demand in order to stimulate the economy. One way to inhibit the practice of wealth accumulation is to impose a wealth tax – more than the current 50% rate – or a 100% inheritance tax. The problem with the wealth tax is that it will encourage the wealthy to leave to tax authority – no gain. A 100% inheritance tax is also problematic because a) the tax authority has to wait until the death of said individual, b) it will encourage tax avoidance, c) it will inhibit small savers from saving.
The viable alternative is to have a tax cut for the wealthy on condition that they spend their accumulated wealth, as opposed to further accumulation. The effects of this are a) it will be act as a redistribution of wealth, b) the multiplier effect will engage leading to increased growth and falling unemployment, c) tax receipts from indirect sources will increase.