It is impossible to overstate how important economic growth is. About 40% of the world’s population, 3 billion people, live on less than $750 per year. By comparison, the average American earns about $58,000 per year. Those in the deepest poverty live at a “subsistence” level –barely enough to stay alive, and no better than in the days of hunter/gatherer societies. Realistically, the only way this many people can be lifted out of poverty is through economic development and growth.

Although economic growth will raise the average standard of living, the gains in standard of living are not distributed evenly. Many feel that the rich should be heavily taxed, and their income redistributed to the poor, so that they too can benefit from the gains in standard of living that come with economic growth. But in market systems, economic growth often happens because an entrepreneur was willing to take a risk in order to get rich. If the rich are taxed too much, maybe the potential to get rich is so diminished that the entrepreneur would not take risks, and economic growth will not take place at all.

Because the potential to become wealthy is the motivation for a lot of productive activity, many economists feel that income inequality will always exist, and is a natural part of our economic system. People who hold this position often believe that the rich should not pay taxes at a higher rate than middle class individuals, because their success eventually benefits everyone. Moreover, high taxes can discourage work effort via “the substitution effect”: higher taxes mean that substituting leisure for work effort becomes more attractive, so the rich will choose not to work as much, which means (it is claimed) less economic growth and more unemployment for the economy.

Others feel that the rich should pay higher taxes simply because they are better able to afford it. People who hold this view often believe that wealth is a function of luck as much as skill, and believe that higher taxes will not necessarily decrease the work effort due to “the income effect”: higher taxes mean that the rich will just have to work harder to accumulate enough of their income to be able to retire. If the successful rich have to work harder to get to the point where they are wealthy enough to retire, doesn’t that mean more economic growth and less unemployment for the economy?

So what do you believe? Should everyone pay the same percentage of their income in taxes? Or should the rich pay income taxes at a higher rate than everyone else? Please take a position on the issue and support it with economic reasoning, information you learned from reading the chapter material, and with internet research (post a link to at least one article or website that passes the (Links to an external site.)CRAAP Test (Links to an external site.)).

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