Thursday, May 31, 2012
Progressive Taxation Encourages Investment
Progressive taxation can be an important tool in conserving natural resources, since it increases the relative present value of future returns, by reducing the returns to immediate exploitation of the resource. Consider an example: A capital good, a wood lot, say, provides an income stream of $100,000 in perpetuity. Now, if the tax is flat, and the resource can be cashed out, for $2,000,000, and invested at interest for 5%, then the owner would be indifferent to exploiting or conserving the resource. On the other hand suppose, with a progressive tax, the $100,000 was taxed at a miniscule rate, and the $2,000,000 at 50%. Then the owner would have to be able to invest the $1,000,000 that remained after taxes at a 10% rate in order to be indifferent to preserving or exploiting the resource. If this rate were unavailable, he would be more interested in conserving, rather than exploiting, this resource.
Indeed, progressive taxation increases the relative present value of any future income stream, and so encourages investment in the future.