Taxing capital income for redistribution is not the solution to inequality

The idea of fairness and equity has gathered a lot of momentum. Currently, even some of the world’s richest people say they would like to see a more equal and fairer society. And to achieve this, they want governments to tax them more.

The guilt-ridden rich say they would like to see a fairer tax system that taxes them much more heavily. Bill Gates, for instance, feels that he has been unfairly rewarded for the work that he has done and argues that taxing capital income more heavily will, among other things, narrow the gap between the rich and the poor.

However noble these intentions might be, raising taxes for the purpose of redistribution is not an efficient way to reduce inequality.  Raising taxes reduces economic growth. Consequently, lower growth leads to lower-income levels for everyone.

Capital taxes are distortionary

Unlike labor and other inputs of production, capital is very mobile. Thereby a tax on capital is much more distortionary. Even if these taxes are supported by the rich, the incentives that they bring would still prevail considering that our country operates in an open economy.

These results have been witnessed in Europe”

Countries repealed their wealth taxes for a combination of reasons: they raised little revenue, created high administrative costs, and induced an outflow of wealthy individuals and their money. Also, many policymakers have recognized that high taxes on capital damage economic growth.

Redistribution has other shortfalls

This is not to say that redistributive efforts fail only due to the effect of higher taxes on economic growth. Governments, in short, do not possess the right tools to formulate programs that would efficiently eradicate poverty. Therefore raising taxes for the sake of funding government intervention activities in itself imposes double costs on society without much to show for it.

If we are being realistic, providing economic freedom has proven to be the most sustainable and effective way to ensure economic mobility among disadvantaged individuals.