Why heavily taxing the rich will not cure income inequality – Business Daily
Focusing on the super-rich to cut the income gap is unlikely to work. PHOTO | POOL
As frequent as the dawn of a new day, all capitalist economies have convinced themselves that the successful route to achieving prosperity and reducing the inequality gap is to impose heavy taxes on the rich.
These views are motivated by empirical data indicating that the gap between the “haves” and “have not” continues to widen, threatening the economic system. How practical and realistic is this approach? Since income inequality will always continue to widen.
Firstly, countries dictate their tax policies in different directions depending on how much revenue the government needs, with some aggressively targeting the rich while others proposing incredible tax cuts to spur economic growth.
This informs their reason to either widen the tax base and bring more individuals within the tax net or promote tax cuts in sectors that generate employment and industrialisation.
Closer home, the President recently made remarks suggesting the urgent need to introduce wealth tax, which will slap higher tax on Kenya’s high-income earners, commonly referred to as, high-net-worth individuals “HNWIs”.
Of course, these sentiments have been echoed centuries before, with the proponents emphatically posing that the rich needs to be taxed heavily to compensate for the income inequality in society.
However, as mentioned above, each country’s tax policy may differ, and the motives informing their respective tax policy could also differ.
Despite the differences, everyone agrees that governments should uphold fairness in their tax policies. And, should not “tax the rich just because they are democracies where the poor outnumber the rich or because inequality is high” as cited in an article published by the Princeton university press in 2016.
They should, however, tax the rich when it’s evident that the State has privileged the wealthy, and so fair compensation demands that the rich be taxed more heavily than the rest. But, one would quip – How did income inequality or wide disparities in wealth emerge in the first place? Did the wealthy work harder than the rest or were they twice as lucky?
Before losing track, I should go back to what influenced the thoughts of redesigning tax policies to heavily tax the rich. Proponents advocating this usually base their arguments on the ability to pay doctrine- a progressive taxation principle that states that, taxes should be imposed according to a taxpayer’s ability to comply.
Hence, the more the income, the more taxes one is required to pay to compensate for the income inequality because, the poor “bear the brunt of indirect taxes on common consumption of goods”.
Importantly, in this debate, the opponents also argue that taxation of the wealthy alone cannot aid in reducing the income gap or the disparity in earnings.
The inequality gap is growing, and the trend is likely to continue since the gap has not widened because the middle class are less hardworking.
Accordingly, the ideal response to extreme inequality requires addressing other critical social-economical factors such as the rule of law, impediments to success, stagnation of middle-class income, institutional quality, corruption, governance, government size, and general social welfare.
It inevitably follows that, the tax system alone, cannot be used to reduce income and wealth inequalities.
There is evidence suggesting that heavily taxing the rich has a direct consequence at the micro and macro level of any economy.
Writer is the managing partner, Baston Woodland & Co Advocates