Should the rich pay more taxes to reduce inequality?

Governments argue that taxes are a necessary evil—the price of a “civilized society.” Whether you agree with that sentiment or not, it is undeniable that the price is usually a high one. Progressive tax policies have always been based on the idea that wealthy individuals should pay more, in proportion to their means. A specific question within this idea is whether they should pay more specifically in order to reduce inequality and lift-up poorer classes.
Arguments in favour:

• In a market economy, the larger an investment is, the higher its rate of return. This is due to both economies of scale and the increased range of investment opportunities. In addition to these economic forces, those who control greater amounts of capital within a society are able to participate more directly in shaping government policy, often in ways that further maximize their wealth. Thus, due to both economic and political realities within a market economy, it is a natural process for the wealthiest individuals and firms in a society to become disproportionately wealthier over time.
• In response to the concern that progressive taxation creates an unfair psychological burden on the wealthy, it is argued that if the utility gained from income exhibits diminishing marginal returns, as many psychologists assert, then for the tax burden to be shared in a utilitarian way the tax-bill must increase non-linearly with income.
• Societies are only fair if poor people who work harder, and have capability, are able to make it out of poverty. Progressive taxes are needed in order to pay for the schools, and programs that can make this a reality.
• Inequality is a problem when the poor have little chance of upward mobility. Progressive taxes that prevent inequality prevent civil unrest. In order to prevent the political instability resulting from the natural stratification of the populace into an ever smaller and wealthier aristocracy or moneyed class, and an ever-larger working class, all free market democracies engage in progressive taxation and programs to enhance economic opportunity for the lower and middle classes.
• Progressive taxes help prevent the offspring of billionaires from becoming a permanent the ruling class. Rich people have plenty of advantages in our society. They have better public schools, better healthcare, can afford better lawyers, get treated better by the law, and can pass on large sums of wealth to their children. If they have to pay a little bit higher taxes it is the least they can do.
• The government provides the roads, libraries, schools, and protects rich with armies, and policemen. The government made it possible for them to make their wealth. Paying slightly higher taxes is not too unfair, and it is better than public unrest caused if the plight of the poor is ignored too long, and they grow disgustingly rich.
• Vertical equity usually refers to the idea that people with a greater ability to pay taxes should pay more. Some believe that the wealthy have a disproportionately greater interest in maintaining societal goods typically supported by taxation such as security of property rights, defence and infrastructure, as they have much more to lose if these fail than do the poor. Public investments in defence and foreign aid often support assets abroad whose expropriation is a far greater risk than is the risk involving domestic investments.
• It is inherent in tax policy that it implements economic and social policy. People who are concerned about a runaway, cancerous character in the global economy, greenhouse gases, etc., see benefits in progressive taxation, both in its braking effect on the economy and in helping shape economic activities towards necessities more effectively than purely monetary or fiscal policies

Arguments against:

• Progressive taxes lower savings rates. High-earners have a lower average propensity to consume, so shifting the tax-burden away from them will increase the aggregate savings rate, which should increase steady state growth (if the savings rate is initially below the Golden Rule savings rate).
• Brain drain and tax avoidance. High progressive taxes may encourage emigration because taxes are not internationally harmonized, so very high earners are sometimes able to relocate in order to pay less tax, or find tax havens for their income. Unlike the opposing income effect and substitution effect of leisure, which may make tax progressively neutral in terms of working hours, the emigration rate must increase with the top rates of tax.
• Increase in tax loopholes such as income splitting techniques. This creates an incentive for business owners to split their business into smaller, less efficient ones for a lower tax bracket. It also encourages production from less efficient smaller businesses than larger ones.
• The increasing energy expended on tax avoidances which occur with greater progressivity produces an increase in the work of accountants and lawyers. Because tax avoidance creates no net wealth this work is unproductive, and can make taxes on the rich less efficient than on the middle class, who have less motivation to exploit tax loopholes.
• Progressive taxes are argued to create work disincentive. Consider again someone who makes twice the minimum required to live on but pays all income above the minimum living threshold in taxes. Such a person had no monetary incentive at all to try to increase his or her income above the base level.
• Justice in representation: economic equity is sometimes used to argue against progressive taxation, on the grounds of representation being out-of-proportion to taxation: While the top 5% in income in most countries pay over half the taxes they have only 5% of the voting weight. This argument can be reversed into the plutocratic case that if tax is to be progressive it should be accompanied by greater say in elections for those who contribute most.
• Policymakers are argued to be under a pressure from lower and middle income voters to limit higher incomes by the means of progressive taxation. A few economists argue against inequity aversion: “If policy makers’ primary goal is … economic prosperity for all, they should avoid focusing on the politics of envy.” (Gregory Mankiw)
• A study from the libertarian Institute for Policy Innovation, which aims to reduce government intervention in the economy, has concluded that progressive taxes fail to decrease real income inequality. Some libertarians, especially anarcho-capitalists, argue that only poll taxes can be economically efficient in the fullest sense (the utilitarian view), and/or that equity requires each citizen to pay the full exchange value in trade for governance services such as the guarantee of property rights (the natural rights viewpoint).
• Progressive income taxes punish success and may have some distortionary effects (on entrepreneurship and job mobility, among other things) Progressive taxes punish hard work and good behavior. Progressive taxes punish those with marketable skills.
• It has been argued that progressive taxation violates the principle of equality under the law. Being fair means that you treat everyone the same. You can’t tax the rich at a higher rate and say that you are fair.