Why higher taxes benefit the wealthy

The economic landscape seems pretty clear. The great divide.

a. On the one hand, the wealthy citizen abhors higher taxes, even taxes which are raised to address the increasing Federal and state budget deficits. After all, they worked hard for their money. Why should they sacrifice their gains to help others.

b. On the other hand, we have representatives in the Senate and House of representatives and various other spokespersons for the common man and woman. These voices reason that the wealthy have gained the most so they should be most willing to sacrifice some of their wealth for the common good. Who can better afford these sacrifices than the wealthy?

But what is a sustainable solution to this socio-economic puzzle? Certainly we can all agree that the annual budget deficits of $1 trillion dollars ($1,000 billion dollars) cannot continue indefinitely.

I would propose that diminishing this annual deficit, even if achieved by increased taxes will benefit both those of considerable wealth as well as those of modest income. And here is why.

The mere idea that this annual deficit will diminish is likely to have a massive, positive impact on the economy and the financial markets that reflect economic well-being.  And the wealthy stand to benefit significantly from the growth in both the economy and the markets.

I submit that the benefit of increased income of the wealthy will outweigh the sacrifice that they endure through increased taxes. Consider the following example: Row

Row

 Year 1

 Year 2

 Year 3

1

Annual income

 $ 250,000

 $ 300,000

 $ 400,000

2

Incremental tax on investment gains from year 1

 $ 10,000

 $ 30,000

3

Annual taxes

 $ 74,500

 $ 84,500

 $ 104,500

4

Tax as a % of total income

 0.30

 0.28

 0.26

 

5

Gain over year 1

 $ 50,000

 $ 100,000

6

Tax increase over year 1

 $ 10,000

 $ 30,000

 

7

Net change over year 1

 $ 40,000

 $ 70,000

In this example, in row 1, the wealthy taxpayer experiences a significant increase in capital gains from investments as a result of the lower budget deficit.

In row 2 we see that the taxes increase as well, but not nearly as much as the gains.

But as rows 5, 6, and 7 show, the increase in taxes is far less than the increase in income resulting in a substantial net benefit to the wealthy taxpayer.

This example illustrates that if the increase in taxes will result in a lower Federal deficit, then the wealthy taxpayer actually derives a net benefit from higher taxes.

This puts the wealthy taxpayer and the modest taxpayer on the same side of the increased tax argument.

A reduced Federal deficit, even at the expense of higher taxes,  benefits the wealthy earner and the moderate earner alike.

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