The Economist: Don’t go after the rich to fix broken budgets

Key topics:Wealth taxes on the rich are being proposed worldwide.Revenue gains would be small; deficits remain unresolved.Higher top taxes may harm growth, innovation, and fairness..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox every morning on weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..From The Economist, published under licence. The original article can be found on www.economist.com© 2025 The Economist Newspaper Limited. All rights reserved..The Economist.America’s top 1% enjoy a fifth of the economy’s income and pay nearly a third of its federal taxes. Many politicians think they should cough up much more. Zohran Mamdani, New York’s mayor, wants a new 2% city levy on incomes over $1m. Virginia, Rhode Island and Washington state are weighing up similar measures; Californians are likely this year to vote on a “one time” 5% levy on billionaires’ wealth. In Europe, too, there is a similar clamour to target the wealthy. France has seen a popular campaign for a wealth tax. And with Sir Keir Starmer weakened or doomed as prime minister, the left wing of Britain’s Labour Party may implement one of its own.The “Robin Hood” state, which takes from the rich to give to the poor, has obvious appeal. Governments across the developed world are strapped for cash. Budgets are burdened by legacy debts, ageing populations and the need to spend more on defence. But few politicians will countenance raising broad-based taxes at a time when voters, scarred by the high inflation of the early 2020s, are worried about affordability. Booming stock markets, meanwhile, have reinforced the idea that inequality is too high. And it always sounds good to say someone else will foot the bill..Read more:.FT: The problem with taxing the rich.Yet plans to fill budgetary gaps by raising levies on the rich are flawed. Taxes are one way governments can redistribute income from the rich to the poor. But that is not their only function: they must also raise revenue without distorting the economy. The system today is failing on all counts. Arguments that high earners do not pay their fair share are mostly empty. And squeezing the rich further will raise trifling sums of money, while causing real economic damage.Consider revenues first. There are simply not enough fat cats to fund welfare states by themselves. The proposed wealth tax in California would raise about 2% of the state’s annual output—not much for a swingeing one-time levy in the place with one of the world’s greatest concentrations of billionaires. The figure for Mr Mamdani’s proposal is around 0.25% of output annually. The limited revenue-raising power of the rich is why European governments have to fund their big spending with broad-based levies, such as taxes on consumption. By contrast, America, with its low overall tax burden, can get by with one of the world’s most progressive tax systems.Loopholes benefiting the very wealthy should certainly be closed. The biggest problem in the American tax system is at the very top. The resetting of the basis for capital-gains tax upon death allows billionaires who hold on to assets, borrowing against them to fund spending, to avoid the levy entirely. The dodge is outrageous. Yet ending it would yield only a tiny amount of money, probably less than 0.1% of GDP annually. The same goes for raising inheritance tax, a good tax that has never generated much money.Another problem with increasing taxes on the rich is that it damages the economy. True, it would take a lot to stop bankers and lawyers turning up for work. Yet in New York they already face a combined federal, state and local top tax rate of 52%. And the cumulative impact of such levies on risk-taking, enterprise and innovation—the lifeblood of economic growth—may cause real harm. Recent research finds that facing a one-percentage-point higher income-tax rate reduces the likelihood that someone will file a patent in the following three years by 0.6 percentage points. This loss of entrepreneurial effort hurts society more than it hurts innovators, who by one estimate capture just 2% of the value they generate.You might think that the one unassailable argument for taxing the rich would be fairness. But even that idea is dubious. The presumption that governments have failed to ensure taxes on the rich keep up with their income is mostly wrong. The rich world does more redistribution than ever. In Britain, France and Japan income inequality has fallen after taxes and spending. Since 1990, America has offset much of the rise in pre-tax inequality with more redistribution. Taxes on the top 1% are higher, and spending on the poor, such as on health care, has grown. Besides, fairness is not just about making incomes equal. A fair system would also respect property rights, be reasonably predictable and allow people to reap the rewards of their efforts and risk-taking.Of all the proposals, California’s most dramatically fails these tests. It looks more like the arbitrary seizure of property than progressive taxation. No one should expect the promise that it is a one-off levy to be honoured. It is a safe bet that the left will raid the same billionaires again the next time they have a programme to fund.Broad-based taxes do not only raise much more money. They are also politically healthier. A society where the many pay tax and benefit from spending is stronger than one where the few have to pay for the many. If progress on artificial intelligence concentrates incomes at the top, as almost everyone in Silicon Valley expects, then the tax system will require fresh thinking. But that world, if it comes at all, is some way off..Read more:.Time to end the obsession with over-taxing the rich: Woode-Smith.Today, polls and experiments show that voters pay woefully little attention to the nasty side-effects taxes have on the economy. Without a personal stake in keeping taxes low, they are less likely to keep hare-brained public schemes in check. Only by exposing voters to both sides of the ledger can you expect them to pay heed to the benefits and costs of government spending, rather than always favouring more handouts.Tax bands of merry menAt a time of rising public spending, it is dangerous to suppose that the rich can always just pay a little bit more. Yet most left-wing governments would gladly embrace their inner Robin Hood and raid away. When pressures on the public purse are great, it is tempting for leaders to reach for ways to raise revenue that, in the short term at least, impose the least political cost. Taxing the rich will wreak economic and political damage in the long term, however—and will fail even to bring in the revenue that governments need. Emulating Robin Hood and his merry men might look tempting. But it is a trap.

The Economist: Don’t go after the rich to fix broken budgets

Key topics:

From The Economist, published under licence. The original article can be found on www.economist.com

© 2025 The Economist Newspaper Limited. All rights reserved.

The Economist

Related Stories