How taxing the wealthy will benefit everyone

Taxing wealthy peoples earnings can help reduce inequality while maintaining overall stability . Taxing capital can help reduce inequality while maintaining overall stability .

New Delhi, India, June 23: Taxing wealthy people's earnings can help reduce inequality while maintaining overall stability, but only with two requirements.Firstly, the tax revenue must be invested in public facilities such as schools, public transportation, or renewable energy grids.Second, it must be economically feasible to substitute machines with labor, according to a team of economists led by the Potsdam Institute for Climate Impact Research.There is a lot of talk about levying large individual wealth to reduce inequality.

In addition, the rich could pass on the tax burden to the poor by cutting wages.Taxing capital thus can harm workers' wealth.We tested a wide range of theoretical frameworks, but our experimental finding holds true under all of them, according to a statement published by the Potsdam Institute for Climate Impact Research (PIK).The theoretical assumptions are a bit complicated, but Mattauch says the results are rather straightforward.

The most important part is that the funds earned from taxing capital must be put towards public facilities, which help promote overall economic growth.According to co-author and Nobel Laureate Joseph Stiglitz of Columbia University in New York, the entire economy benefits when using the money from taxing the rich for better education or better climate protection.However, if governments are unable to use funds for these activities, taxing money can in the long run be detrimental to the economy and exacerbate inequality, Stiglitz said.In addition, the report stated that the governments should not be reluctant to impose higher capital taxation on the very wealthy.

The wealthy's saving habits are what drives wealth disparities.According to Mattauch, economists tested a number of realistic tax levels in their plans.However, too-high taxes would incentivize investors to invest money into, say, factories if they are not easily replaced by jobs.Populist plans of taxing private income would damage the economy and thus the public interest.It's a tricky puzzle.

A self-service checkout at a grocery store can eventually substitute a person, or a health-care robot could one day replace a nurse in developed economies.Because money is expended in those machines, automation is crucial.If capital taxation reduces investment, productivity must be maintained by occupation.This is an empirical question, particularly because artificial intelligence is becoming more important and difficult to replace in major economies such as the United States and China, recently also due to the COVID crisis, according to Ottmar Edenhofer, co-author of the study and director of the Potsdam Institute and the Mercator Research Institute on Global Commons and Climate Change.This is mainly the rich getting richer, not the poor getting poorer.

People must unite, and the increasing wealth disparity in this respect is a danger that we may consider reducing, according to Edenhofer.