Should Top Earners Pay Over-the-Top Taxes?

By Alan Olsen

It’s a debate almost as old politics: should the nation’s wealthiest earners pay more in taxes simply because they earn more money? People on either side of the debate make strong arguments for both sides and they are very passionate about their beliefs. While those on the left side of politics cry foul when it comes to the wealthy taxpayers paying their fair share, those on the right say enough is enough: taxing the wealthy will only hurt the economy. But what if we could step outside of the political context of this argument and look at it solely on the basis of the economy and dollars, and the real effects of getting the rich?

What to Consider

An economist at Stanford, Florian Scheuer, recently took a different approach to this debate by looking at it from a nonpartisan, financial point of view. He raised some important questions that taxpayers and lawmakers should consider before they make a decision on how to handle taxes on the wealthy. For example, Scheuer says it’s extremely important to ask “why” high net income individuals are getting so wealthy before they decide to lower, raise or leave taxes as they are for the rich. In conducting his research, Scheuer included real-world features of labor markets into the current tax models to come up with his conclusions. So what were those conclusions? Some of the answers might surprise you.

Careful What You Wish for

The business world is much like the world of professional athletes in that the top CEOs and other executives are the ones making the most money, just like the most elite athletes are the ones with the biggest contracts, leaving the average executive, or player, in the dust in terms of salary. But should those super executives pay more in taxes just because they have access to the super earnings? According to Scheuer, because top executives do more, and in turn, reap greater rewards, any action that would discourage their efforts will have larger consequences on revenue, and likewise will make distortions from any tax increase even greater.

Don’t Bite the Hand the Feeds You

So according to Scheuer: “If CEO pay hikes are at the expense of workers doing productive work, then raising taxes on CEOs will likely lead to an increase in more fruitful activities.” However, “if top earners are making outsize profits from winning against others in the same line of work, raising taxes would backfire.” For example, if investors who make quick stock trades in order to turn a fast profit were taxed more they would likely be discouraged from making such trades. This could be detrimental to the trading market because these types of investors are often looking for the top locations and best new technologies to invest in. These kinds of investments would have a more difficult time becoming successful without the help of these types of investors.

Consider the Issue Carefully

The reality is the question of whether or not the highest earners should have to pay even higher taxes, is not cut and dry. There are several factors that must be weighed and considered before lawmakers make any major decisions, as the consequences could have a huge impact on the business world and the economy.