Taxing the wealthy to the hilt would make us all much better off

But is it really true that high taxes — even very high ones — are detrimental to societal well-being? (File photo: Olga DeLawrence/Unsplash)

In Canada today, one person — media magnate David Thomson — possesses roughly CA$73 billion while more than 235,000 people are homeless. In Toronto alone, 187 homeless people died on the streets in 2022.

What can be done to address these kinds of disparities?

Though most people naturally dislike inequality, it’s often argued that raising taxes on the rich will do more harm than good by damaging incentives and investment, thereby slowing economic growth and ultimately hurting us all.

“Given five fat sheep and ninety-five thin, how [to] induce the ninety-five to resign to the five the richest pasture and shadiest corners?” the famous British philosopher R.H. Tawney once asked. He continued:

“By convincing them, obviously, that, if they do not, they will die of rot, be eaten by wolves, and be deprived in the meantime of such pasture as they have. Nor, indeed, hitherto has it been difficult to convince them, for there is nothing which frightens thin sheep like the fear of being thinner.”

But is it really true that high taxes — even very high ones — are detrimental to societal well-being?

The last few years have witnessed an explosion of new evidence from economists, sociologists, political scientists and ecologists that suggests they’re not.

Exaggerated concerns

It’s accurate that high taxes on the wealthy bring real risks. But in general, the downsides are highly overblown.

For instance, a common worry is that rich people will respond to high taxes by working less. But there’s essentially zero empirical support for this claim. In fact, there is now close to consensus among researchers that while the rich do frequently try to avoid taxes, they don’t do so by working less.

The most serious potential cost of high taxes is the reduction of private investment. This is definitely possible.

But the key point to keep in mind is that such a reduction is only half the picture. It’s wrong to think of taxes as simply reducing investment, because states do not simply collect taxes — they also spend them.

Therefore it’s more accurate to regard taxes not as reducing investment but as rearranging it — from the private sector to the public.

Whether this is a good or bad thing depends entirely on the details. In many cases, levying high taxes on the rich will mean money is no longer invested in foreign stock markets or spent on unproductive things like private jets and multiple mansions, but is rather spent on productivity-enhancing entities like schools, hospitals, roads, public research grants and so on.

Indeed, critical research shows that, all things considered, high inequality actually tends to reduce an economy’s overall growth rate.

The most sensible and cautious conclusion is that high taxes — very high taxes, in particular — could somewhat reduce economic growth, but these costs are likely to be only mild or moderate.

What about the other side of the ledger? What are the social and economic benefits from high taxes and reduced inequality? In my book Against Inequality: The Practical and Ethical Case for Abolishing the Superrich, I note that five stand out:

1. The environment

It’s well-known that the rich emit far more carbon than the rest of us. The wealthiest 20 people in the world emit 8,000 times more carbon than the poorest billion people on Earth combined.

So imposing high taxes on the rich would be doubly effective from an environmental perspective. It would directly reduce the copious emissions of the rich. And it would provide the necessary resources to build the new low-carbon infrastructure — including public transit, green energy grids, etc. — that we desperately need. That would indirectly help the rest of us reduce our emissions too.

2. Our democracy

The evidence is overwhelming that inequality erodes democracy. For instance, American scholars Martin Gilens and Benjamin Page examined 1,779 public policy debates between 1981 and 2002 to see whose voices actually mattered in deciding important issues.

They found that:

“The majority does not rule — at least not in the causal sense of actually determining policy outcomes. When a majority of citizens disagrees with economic elites or with organized interests, they generally lose.”

Such evidence demonstrates that significant inequality can actually break a democracy, transforming it into oligarchy, as has arguably already transpired in the United States.

3. Opportunity for all

Inequality makes a mockery of the cherished aspiration of equal opportunity. To take one particularly egregious example, the poorest residents of Chicago today face a life expectancy 30 years shorter than their richer neighbours down the street.

High redistributive taxes could reverse this most brutal of disparities.

We also know that countries with more equality tend to have greater social mobility too.

Richard Wilkinson, the famous British epidemiologist and inequalities scholar, likes to quip that if Americans want to live the American dream and not just dream it, they should move to high-tax Denmark.

4. Reduced xenophobia and racism

Though right-wing populism has many complex causes, research clearly demonstrates that one of its main drivers is economic insecurity. That’s likely because insecurity increases fear that one’s already precarious position will be worsened by competition from “immigrants” and “others.”

The evidence shows that right-wing populism can be effectively reduced by enhancing economic security — for instance by taxing the rich to fund free public services — a stronger safety net and perhaps even a guaranteed basic income.

As neo-Nazis once again march in the streets, hate crimes rise, far-right political parties receive more public support than any time since the 1930s, the benefits of reducing such terrifying threats are hard to overstate.

5. Reduced social friction

Reducing inequality also builds community health and cohesion.

It encourages greater levels of agreeableness and tolerance, better mental health and reduces crime.

All in all, the costs of high taxes and low inequality are likely to be only moderate. But the benefits are truly enormous — a different order of magnitude entirely.

Tom Malleson, Associate Professor of Social Justice & Peace Studies, Western University

This article is republished from The Conversation under a Creative Commons license. Read the original article.