by Moe Zilla

Created on: July 29, 2010

It will destroy the economy by stifling the creation of new jobs - or else it won't. Both sides of the argument will tell you they know exactly what will happen to economy after a tax hike on the wealthy. Unfortunately, there's two different scenarios, and there's no agreement on which is correct.

One side argues that tax hikes will simply mean more tax revenue flowing in to the government. They'll tell you that this money can then be used to pay down the government debt, which may have a reassuring effect on the people who invest large sums of money in government bonds. In addition - their argument goes - the government money can be used to fund infrastructure programs like highway construction and other "stimulus" programs. The hope is that redistributing this money from the wealthy to government projects will create new jobs and increase consumer spending, which will jump-start the economy.

The other side argues that jobs are created by those very rich people who are penalized by tax hikes. They'd like to expand their operations or invest in new businesses, both of which would create jobs and stimulate the economy and consumer spending. But, their argument goes, the government snatches up the very money that they'd use for these investments. If the rich could avoid future tax hikes, they'd have more money to invest - along with an incentive to move their operations away to countries with more favorable tax policies.

Unfortunately, there's a huge amount of money at stake, based solely on the outcome of this debate. For this reason, it's easy to wonder if these positions are being pushed out of self-interest - not because of economic data, but simply because millions of dollars could be saved if, for example, the tax hikes are avoid. One counter-argument says that the government can actually collect more tax revenue by lowering taxes on the rich - since the rich (and their newly hired employees) will then earn more money,all of which can be taxed. But I've seen this argument dismissed with a derisive oversimplification: "Tax cuts are magic." It feels counter-intuitive to believe that lowering tax rates somehow increases tax money collected.

There's no shortage of opinions in the debate on taxing the wealthy. Just remember that many of the debaters have a vested interest in the debate's outcome! While there's fierce and furious opinions, it's probably better to settle the question by seeking out an authoritative source. If you'd like to understand the impact of tax hikes on the economy, ask an economist, and not a politician!

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