How to Tax the Rich

I’ve recently started reading “Economics in One Lesson,” a 1946 book written by Henry Hazlitt. In its essence, it is a treatise on the merits of classical economic thought over ‘modern’ economic thought. The basic proposition, which I largely agree with and find quite compelling, is that capital is more effectively and efficiently used to generate wealth when it is kept in the hands of private citizens, as opposed to being taken and redistributed by the government through taxation.

One prevailing conflict in American economic thought is the role of taxation with regards to the wealthy. Should the wealthy be taxed at extremely high rates in order to have them “do their fair share,” or should they be taxed at a moderate rate that is similar to the middle class, with the expectation that they will create jobs with their capital and in that way enrich the economy?

Both arguments have some merit, as I see it. On the one hand, if the wealthy are not using their money in capitalistic endeavors, then they are simply taking wealth away from the economy and leaving everyone else the worse off, meaning that taxing some of it away from them will provide good to those who need it while causing minuscule harm to the rich. On the other hand, if moneys are taxed away from an active job-creator, some of the money will fall through the cracks of bureaucracy and cause a net loss for the economy once the funds are finally spent on public works projects.

Rather than “tax the rich more” or “tax the rich less,” why don’t we have a tax rate for ‘hoarders’ and have write-offs for reasonable risks taken to create employment, such that a particularly wealthy individual who diverts all of their funds into stimulating the economy pays far less in taxes (due to their service of job creation) that an individual who simply shores up their bank accounts?

Consider a marginal tax rate of 60% for incomes above $250,000 (with allowances for the local cost of living index, and an acknowledgement made of the difference between a working individual with a high salary versus someone whose income is primarily based on capital gains), with potential write-offs that would reduce the marginal tax rate as far as to 10% if the marginal income were being used for corporate investment and job creation?

That is to say, for every dollar above $250,000 that an individual makes, that dollar will be taxed according to how much of it is used to stimulate the economy, at a rate of 60% if it is not used at all, and a rate of 10% if it is used in its remaining entirety. Under such a scheme, it becomes very beneficial to invest in creating employment opportunities, since you are paying a low tax rate on that dollar and additionally have the potential for gains that outweigh the taxed amount. Hoarding becomes hugely inefficient compared to engaging the markets.

I feel that such a schema could address the problem of “the 1%” hoarding their wealth and thus stagnating the economy, while leaving in place an incentive for honest capitalists to accumulate wealth for the purpose of entrepreneurial endeavors. I hear repeatedly that “trickle-down economics does not work” while also knowing that the inefficiencies of government and the basic nature of debt combine to make taxation less efficient at stimulating growth than free enterprise. I believe that a hybridized system, which rewards active risk taking while penalizing those who accumulate wealth for its own sake, could provide an effective balance of policy which would allow for optimal economic growth.

I am a lower-middle class individual, and have very little familiarity with the United States tax code, so it is entirely possible that some version of my presented model is already in place. As a relatively young student of economic theory and practice, I welcome any constructive criticisms and well-said counter arguments to my proposed model and its underlying assumptions. My hope with this exposition is not to revolutionize, but rather to join in the national and global discussion of economics, learning what I can and perhaps together with others coming to a greater understanding of the underlying truths behind markets and exchange.