Will a “tax on rich” save the US economy?

Higher taxes on top earners of the US could help to “keep afloat” the American economy, some analysts think. On the contrary, it could lead the economy deeper into recession, think others.

So, the question is: What to do after so-called “Bush tax cuts” expire on Dec, 31st 2010.

Well-known economic theory says that during a weak economy it is a bad time for a tax increase. But where many economists call for additional stimulus, there are those who believe that higher taxes is a necessity.

The Obama administration wants to keep the lower rates in place for more taxpayers earning less than $200,000 a year, even as rates in the top bracket are allowed to rise.

At that time, William Gale, co-director of the Urban-Brookings Tax Policy Center, argues about what government can do with the extra money. It can be extended unemployment benefits, infrastructure projects, aid to states and local governments. All this is going to stimulate more economic activity than putting it in the pockets of the wealthiest taxpayers who he argues would rather save than spend money.

Of course this point of view is extremely questionable. Tax hikes have quite often, in the past, resulted in LESS taxes received by Government. And a lot of free market libertarians are calling for less government and less intervention.

Forecasts from Macroeconomic Advisors determine that the GDP would rise at an annual 4.1% rate in the first quarter of the next year if all tax cuts were extended. But if rates were only raised on rich taxpayers, the economy would grow at a 3.8% rate.

But even some of those who argue for an additional stimulus worry that the economy is too weak to increase anyone’s taxes.

Other economists argue that raising upper-income rates will hurt a broad range of workers who depend on the spending done by those with more discretionary income.

It’s for the Obama administration to decide.

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