16.1 Further benefits of taxing savings against additional profit taxing
If the government is taxing profits, it is indeed withdrawing financial resources from people who might have some meaningful use for them. They can be planning to use them in new business ventures or research and development. They could use them to increase the salaries or their existing workers and so help the economy enormously. If they just planned to spend them on their personal use, this would be still better then often artificial/inefficient government spending. After all, people deserve to have a reward for their business success and my theory has nothing against it. Spend as you like. But spend!
Excessive taxation of profits represents direct hit on primary human motivation to derive benefits from their work and risk taking. It is indiscriminately taking the means of growing the business and deciding what to do best with it´s proceeds from hands of its owners and so slowing down the economy.
In that view, it is possible to agree with right wingers, liberals, Republicans…
The top tax rate growing to ultra high levels like 75% proposed in France is inevitable going to lead to decline in business activity and tax evasions. Most likely the companies and individuals affected with such high rates will try to pass such higher tax on employees by increasing the profit margin (cost cutting, rising prices) or leaving the country at all which will do to the economy the exact opposite as planned result.
But the economy needs additional resources, as not all the profits are spent or reinvested!
This is the point in which left wingers, socialists, Democrats are fully right, too.
Without some way to collect unused capital and redistribute it between people the system would come to a grinding halt. If such additional resources are coming from debt or unrestrained monetary easing, there are consequences.
So there are two opposing views on taxation, both correct in their substance. Right complaints that higher taxation is taking away the resources needed for further development and spending and Left is complaining that redistribution is absolutely necessary. The fun is, they are indeed both right.
And this is the biggest confusion that is causing the bitter political grudges and fights as both sides of political spectrum are defending their position with more and more drastically means, all truly believing their cause being holy and undisputable.
But as there are entrepreneurs who are indeed planning to use their money there are also many such who just intend to hoard them. The argument that such saved capital is too coming back to real economy through lending is not acceptable. Such loans based increase in buying power is just temporary and in effect with repayments including interest it does not constitute any increase of permanent global buying power. What we need is permanent flow of demand against the permanent offer of supply. Only that way we can have economy without recessions.
So instead of increasing the taxing of profits, we should be taxing the savings.
The savings came as all participants already exhausted their use of profit. If they wanted to invest they did. If they wanted to spend, they spent. What is left is the excess which is causing all economy problems and so should be taxed. By the way, such taxation is already happening in a hidden form.
What are all the property taxes, car taxes, inheritance taxes and other, which are based on ownership of some items?
These are indeed designed to reduce the saved amounts as they are payable without regard of income. So even jobless, you have to draw from your savings to pay them. And this is again a bit unfair and damaging to economy as indiscriminative taxation of this kind without regard of income status is hitting hard on common consumption. It would be more just to design these taxes openly, direct them at savings without pretending some other cause and clearly declare tax bands.
By introducing such taxation there would be no hit on motivation to conduct business as all the profits (after standard profit taxes, I am not advocating to abolish the profit tax altogether) would be at the hands of business owners and they could really do with it whatever they see best. The missing buying power in the system would be replenished through state transfers financed through monetary policy and after savings would start reaching above established threshold levels, tax on savings would kick in and further transfers would be financed through that tax and all other standard taxes. So the amount of money in circulation would be stable, without deleveraging contractions causing recessions.
What do the people do first in recessions?
They start saving. Naturally, after somebody already experienced recession and saw the fate of unemployed there is nothing to question about that personal strategy. Even if the saving amount is just a little bit above the usual norm, it does aggregately enormous damage to the economy.
The best way how to avoid deepening the recession is to stimulate spending but this is actually subdued because of psychological reasons. No any other standard taxes will fix it. If government increases taxes on companies, they will try to avoid it and pass the burden on employees. If the preferred choice is higher taxes on consumers (VAT, sales tax…) than the buying power needed to spin the economy is diminished directly.
Here comes the tax on savings as a real and absolutely fine tuned instrument to fight this problem. Excessive savings are automatically collected by government and redistributed to consumers willing to spend. If some consumers decide not to spend, they will see their additional income coming from employment and government transfers wasted as their excessive savings will be just taxed and taxed. That would break the fear from recession in everyone. To see, that you are getting some extra money in government transfer programs and that money is after some time fully taxed back because you were not able to spend it on anything would take a really masochist not to cave in and start spending.
The recession would be over very soon.
Those hoarding money and so squeezing workers would see no point of doing that as all the excess would be taxed after certain threshold. Those afraid to spend would be easily persuaded that saving is pointless from the same reasons.
Everybody would keep big enough savings to make him feel safe and ability to spend profits would guarantee entrepreneur´s motivation.