EWOT Three

On this Wednesday, I watched the Daily Show with Joe Stewart, in which Stewart talked about the new tax policy increasing the tax on the rich to generate fiscal income to offset the deficit of the U.S. By comparing the different impact on the rich and the poor when taxed the same amount of money, Stewart threw a gauntlet on the fox’s argument that the government should increase the tax basement to include more poor in the tax system. What made me feel this question interesting is the goal of this governmental action: will the tax really benefit the economy?

Admittedly, in the short run, the 2% increase in income tax on the rich will generate 700 billion dollars federal income, which can be used to offset the huge federal deficit insured by the American government. But, since economists not only consider the short term outcome on specific group, but also explore the long term impact of a policy on the society as a whole, we should also consider what will happen after the government solved its ongoing deficit problem.

People response to incentives. The increased tax rate, with no doubts, posts a negative incentive on the rich. How will they response to the comparative shrinkage of their wealth? Will they cut the expense on luxuries like the private jet? Absolutely NO! We know that in the society, people act purposely. In other words, people‘s action are out of their own self-interest. Will the rich lower their standard of living because of their shrinked income? No, they will raise the price of the commodities or service their companies offer to the customers to generate more income in order to maintain their current level of living.

What’s the problem here? The tax burden on the rich has been transferred to the customers, or generally the poor. We can also draw a supply-demand graph to see what will happen to the society if the government charges more tax. Since the government places a longer tax wedge between the supply curve and the demand curve, both the consumer surplus and the producer surplus shrinked, resulting in more deadweight loss within a society. What’s more, Since, in the U.S., the top 1% people controlled over 30% of the nation’s wealth, the bottom 51%, the poor, have no other choices than to purchase their daily necessities from the rich, while the rich can easily transfer their capital to other industries or the investment in other countries, the demand curve is comparatively less elastic. The less elasticity of the demand curve thusly result in more tax burden bored by the poor

Based on the discussion above, the mere action of increasing federal income is not a final solution to the ongoing recession in the U.S. The only way to get out of the recession is not to deliberately distribute the extant wealth of the nation, but to give the bottom 51% American more opportunity to produce their own wealth by the power of education and social equality.