The chief effect of steeply progressive tax rates is to lower the price of luxury and leisure in relation to investment and work.  Paul Craig Roberts elucidated the point:

Take the case of a person facing the 70 percent tax rate on investment income.  He can choose to invest $50,00 at a 10 percent rate of return, which would bring him $5,000 per year of additional income before taxes.  Or he can choose to spend $50,000 on a Rolls Royce.  Since the after –tax value of $5000 is only $1,500, he can enjoy a fine motor car by giving up only that amount.  Britain’s 98 percent tax rate on “unearned” (investment) income has reduced the costs of the Rolls in terms of forgone income to only $100 a year.  The profusion of Rolls Royces seen in England today is mistaken as a sign of prosperity.

As Scott Burns put it with reference to the United States, “We will see more Cadillacs and Mercedes on the roads and more yachts in the water until the very day the economy falls apart.

From the new edition of Wealth and Poverty by George Gilder.  Originally published in 1980 the new version is updated with 40,000 words and views on the current scene.

HKO

It is obvious that higher taxes on investment and savings will discourage savings in favor of ever more conspicuous consumption.  Estate taxes also have this effect.  I may forgo the expensive car to pass on to my children and grandchildren, but if the government is going to confiscate it, hell, I may as well enjoy it.  Low interest rates engineered by the Fed to stimulate the economy also deter savings, and inflation actually encourages he acquisition of non productive material assets, rather than financial assets that increase production.

Much of the capital growth in the 1980’s came as a result of the success in the lowering of inflation. Assets moved from tangible forms often unrecorded to financial assets which were. This also distorted the reported increases in the wealth gap.

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