Taxes: Food for Thought

In my Public Finance class tonight we focused on the Income Tax (whether it should be replaced) and the Capital Gains Tax (whether it should be eliminated). Realistically we know each one will not be eliminated, if anything only renamed...but one could hope.

Some of the population would like to replace the income tax with a variation of the flat or fair tax, but the grass is always greener on the other side. Each type has their own issues and I'm positive neither would improve the current tax situation. The new reform would have to be revenue neutral.

The capital gains tax can be viewed as a tax on economic growth or a tax to control the conspiracy among corporate and political goliaths. Many agreed that taxing the wealthy would probably solve most of our problems, especially since most of the asset and stock holders are the weathly (which isn't true as the middle class would probably hurt the most), so why not just increase it? I'm not sold on the idea that I would increase the CGT - or rather increase it permanently.

After the debate, the professor gave us food for thought instead. He made three excellent points (whether you agree or disagree, they will make you think):

1. There are two schools of thought he said: One either looks at the rich and wishes he/she could be wealthy like that one day; or looks at the rich and hopes they are like me one day. To keep taxing the wealthy would stagnate most of the economy while the rest would find ways to avoid paying the taxes and would defeat the purpose anyways. When the wealthy succeed (Bill Gates - Microsoft - computer boom of the 90s or the decline of the boating economy after the boat tax supposedly imposed just on the rich), the economy succeeds, so why insist on taxing them to the extremes?
   
2. We can all agree on one subject about taxes and that is the Laffer Curve. One of the simplest concepts in economics. When a person pays 0% taxes, they are not earning income. When a person pays 100% in taxes, they will substitute work for leisure and will again not be employed (at least not legally). Many will agree there is an optimal level of taxes for the economy that will (keeping all other things equal, of course - this is economics after all) by reducing its taxes will increase its revenue.
3. Taxes are imposed for two reasons: income and control (discourage/encourage behaviors).