Economic growth comes from:
- investing in new businesses,
- funding expansions of profitable and growing businesses, and
- investing in new equipment, technology and other processes to increase productivity, reduce the cost of production, and lower the selling price.
Additionally, higher capital gains and dividend taxes creates a "lock-in effect." Investors delay selling investments with poor growth prospects that have historical gains to avoid paying the capital gains tax. The natural tendency to defer paying capital gains taxes, delays the freeing of funds that could be used to finance new business opportunities. Slowing the pace of new investments will slow the growth of the US economy.
Higher taxes will not eliminate all private investment, but over time, a slight difference in private investment and per capita GDP growth rates will have a big difference on the average US family's standard of living.
If per capita GDP grows by 1 percent, after 70 years, a lifetime, the average family's standard of living, their per capita GDP, will be twice as high as now. If per capita GDP grows by 2 percent instead of 1 percent, after 70 years, the average family's standard of living will be four times as high as now. Three percent would lead to a eight times as high standard of living as now. Of course, if there is no economic growth, as is possible with higher taxes in our current slow growth economy, there will be no improvement in the standard of living.
Taxing the rich today, slows the improvement in the standard of living of our children and grandchildren. Inequality matters. It is necessity for a growing economy. Inequality is a necessity for a country that wants to help its underprivileged because the rich reinvest more and enable the standard of living of everyone in the US to improve.
From Bloomberg, "Warren Buffett Is Wrong About Taxes" by Edward Conard:
Federal Reserve surveys show the top 5 percent of households save and invest 40 percent of their income. Median- income households save very little, whereas the Buffett household probably invests 99 percent of its income.
If we tax, redistribute and consume income that otherwise would have been invested, the investable pool of savings declines.