Yesterday's newspaper The Hindu reported that India's tainted home minister Mr. Chidambaram wants to raise taxes on rich people (you can read the full story here). He was quoted as saying, “We must raise the tax revenue to defend [the expected aggregate decline of resources]. I know many people won't like this. But, I think, I can summon up the courage to make the statement...I [was] the Finance Minister who slashed your tax rates. Therefore ... you must be prepared to pay higher tax rates, especially the rich must be prepared to pay higher tax.”
Is Chidambaram right about his proposal for raising tax on rich people? Is his policy economically and financially sound? Readers of my blog will know my answer that any kind of taxation is an outright theft of peoples' hard earn money. But I will let one of the greatest economist of 20th Century, Ludwig von Mises, answer these questions. I am reading his extremely important book The Causes of the Economic Crisis right now and came across a couple of paragraphs which specifically addresses this issue of 'raising taxes on rich people'. This is what Mises said,
One widely held view, which easily dominates public opinion today, maintains that taxes on wealth are harmless. Thus every governmental expenditure is justified, if the funds to pay for it are not raised by taxing mass consumption or imposing income taxes on the masses. This idea, which must be held responsible for the mania toward extravagance in government expenditures, has caused those in charge of government financial policy to lose completely any feeling of a need for economy. Spending a large part of the people’s income in senseless ways—in order to carry out futile price support operations, to undertake the hopeless task of trying to support with subsidies unprofitable enterprises which could not otherwise survive, to cover the losses of unprofitable public enterprises and to finance the unemployment of millions—would not be justified, even if the funds for the purpose were collected in ways that do not aggravate the crisis. However, tax policy is aimed primarily, or even exclusively, at taxing the yield on capital and the capital itself. This leads to a slowing down of capital formation and even, in many countries, to capital consumption. However, this concerns not capitalists only, as generally assumed. The quantitatively lower the ratio of capital to workers, the lower the wage rates which develop on the free labor market. Thus, even workers are affected by this policy.
Because of tax legislation, entrepreneurs must frequently operate their businesses differently from the way reason would otherwise indicate. As a result, productivity declines and consequently so does the provision of goods for consumption. As might be expected, capitalists shy away from leaving capital in countries with the highest taxation and turn to lands where taxes are lower. It becomes more difficult, on that account, for the system of production to adjust to the changing pattern of economic demand. (pp. 175-176)
Now, do I need to say anything more?
Mr. Chidambaram must understand that he has no rights to poke his nose in private business affairs. His wrongheaded economic policies will ruin the Indian economy and society if implemented. I dearly wish that instead of innocent honest hard working common man becoming unemployed, all these politicians become unemployed forever. Then and only then this country and our world can progress.