In Economics there is a basic understanding that money is only a medium of exchange.  Money really doesn't anything by itself it is representative of other things.  Money represents productivity and it represents the value of what is produced to society.

Progressive income taxes cause people who make more money to pay a higher percent of that money in taxes.  This sounds good to many people... tax the rich for the benefit of the poor... it's very Robin Hood.  But what are the long run impacts of such policies?  Do they benefit the poor? Do they help or hurt the disparity of income distributions?

I believe that progressive income taxes may be making the income gap wider!  I think that over time the policy is widening the spread between high income earners and low income earners.  I know this sounds counter intuitive but give me time to explain.

People make decisions based on the cost and benefit of those decisions.  High income earners are generally people with a high degree of skill... Doctors, Lawyers, Business/finance gurus, Engineers, Scientists, inventors... generally people with lots of investment in their career.  These people often spend years in college living like monks and come out owing thousands or hundreds of thousands in student loans... WHY?

They do this because they think it will be worth it.  They want high incomes and they are willing to sacrifice years of their youth for a job that pays well when they get older.  Now... Why do these jobs pay so well?  They pay well because there is such a high cost to gain the skills necessary to do them... not anyone can go in and do open heart surgery.  Basic supply and demand keeps the wages for these kind of jobs high to pay these people back for their investment of time and money to gain the skills needed to perform these high value jobs for us.

Now what happens when we increase taxes on these folks?  Well one thing I have learned from my research into economics is this: Government tries very hard to control who pays taxes but they in reality they almost always fail!  Government can control who writes the check but not who pays.  ultimately who pays taxes is determined by many factors but mostly the elasticity of supply and demand.  As we look at high skill high wage jobs it is clear that these people will get their higher relative wages regardless of taxes because society needs them and they are hard to replace.

So we see that the costs of these services will continue to rise to cover these high taxes so that these individuals can recoup their costs and still afford to pay these high taxes.  These means me and you as consumers are the ones actually paying the taxes because those costs feed through to us.  But there is a bigger issue. Psychology

What happens when college students see that if they make good money they will be taxed back into poverty?  What if people considering going to medical school see that the marginal tax rates keep climbing and they may end up not making that much money relative to the sacrifice to get the necessary training?  Well at the margin, econ speak for people who are on the verge trying to decide, trying to determine if its worth it ... they are less likely to choose to go into those fields becuase of the risk that they won't make enough to cover their investment... they are giving up years of their youth and taking on huge debt... for what?  to make 10grand a year more than a highway worker?  Many won't take that risk... especially those on the margin..

 So what happens in the long run?  Well if people aren't sure if they can recoup their costs to get these high skill levels we don't get as many high skilled employees because the sight of high taxes scares them off.  So... Supply is decreased... there are not fewer brain surgeons than there would have been but demand hasn't fallen... so what happens?  Those surgeons now have pricing power.  They now raise their rates not only to make up for the excess taxes but because their is more demand for their services then they can provide and they have to choose who to help.  

What does this mean for us poor folks?  Well it means that over a few generations we end up with a supply and demand elasticity that forces all of the higher tax burden to shift through to us... we pay it in the form of higher medical and legal and tuition bills.  Just check inflation in those fields and see if it proves me right... So we pay the higher tax not the those making the big bucks... they make the big bucks because they are providing a service that is hard to provide!  Otherwise competition would force the price lower... but wait their is more... now because we scared off people from the field with the threat of higher taxes limiting profitability we pay an even higher premium because the supply has been cut and with it competition. 

So Progressive taxes feed through to consumers and are not paid by the high skill workers who write the check but even worse the consumer pays a premium because the bad tax policy has manipulated the marker to make it less efficient by scaring people away from the investment needed to enter the market.  Its terrible!  

If we tax everyone the same we remove the disincentives that alter behavior and we will have more people trying to do these jobs forcing the price down.  Its cheaper on everyone but it especially helps bring down the disparity in income over a few generations.

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    Ludwig von Mises: 'Used to the conditions of a capitalistic environment, the average American takes it for granted that every year business makes something new and better accessible to him. Looking backward upon the years of his own life, he realizes that many implements that were totally unknown in the days of his youth and many others which at that time could be enjoyed only by a small minority are now standard equipment of almost every household. He is fully confident that this trend will prevail also in the future. He simply calls it the American way of life and does not give serious thought to the question of what made this continuous improvement in the supply of material goods possible.' - Economic Freedom and Interventionism
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