Friday, March 7, 2008

Taxes on rich harm middle class

Former student John Tamny from RealClearMarkets has done some clear thinking about Obama and Clinton proposals to increase taxes on the rich:

Consider two countries: A, where individuals invest their capital and keep the gains from those investments; and B, a world where individuals invest their capital but the government keeps 50% of those gains.

Every dollar of return an investor earns from an investment placed in A requires two dollars from a similar investment placed in B for an investor to achieve a similar personal gain. Does anyone doubt that investors from country A will be more willing to pursue investment opportunities relative to investors from country B?

For our often uncertain politicians, let's quickly illustrate why. Let's say investors are offered a project that generates an 8% return. Because of the risk involved with this project, investors require a 6% return for providing their capital.

In country A, investors gladly invest and create new jobs and add to the knowledge in the economy to eventually create new technologies. In country B, investors refuse to invest, as they will only make 4% on their investment since the government will take half of their returns. This country misses out on the additional jobs and knowledge this project brings to all citizens...

1 comment:

  1. And in the case where government takes the taxes and invests in public goods (like education) to increase investment opportunities then people in Country B may well end off better than people in Country A despite their poor personal rate of return because 4% of a big number is larger than 8% of a small number

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