Should we tax the rich? Research says yes

Imagine a world where billionaires pay their fair share of taxes.

While this utopian vision may seem far-fetched, new research from The Australian National University (ANU) suggests governments have a legitimate reason to ramp up taxes on the super-rich.

Starting from 1 July, more than 11 million Australians will receive cost-of-living relief through the federal government’s stage three tax cuts.

Prime Minister Albanese’s recalibration of stage three differs to the plan proposed by the previous Coalition government – distributing benefits more widely across tax brackets and slashing the savings originally designated for those earning upwards of $200,000.

 This reform is more than just Robin Hood economics—reducing taxes on the middle and lower classes at the expense of the rich. According to ANU tax expert Dr Cagri Kumru, it’s also “a cost-effective way to top up the public coffers.” 

“Our study has found that raising taxes on high-income earners increases government revenue more than increasing taxes on the entire population,” Kumru says. “This is due to the way different groups react to tax changes.

“If governments increase taxes across the board, the burden on middle income earners can cause them to reduce their working hours and savings, directly affecting the gross domestic product of a country. 

“Conversely, high earners are relatively unresponsive to these changes, being less likely to stop working or saving less, which is less disruptive for the economy.” 

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Levelling the paying field

By imposing higher taxes on the rich, governments can maximise public funds and reinvest them in the economy. 

“With the surplus from tax revenue, governments can improve income and wealth distribution —a fair share of the economic pie,” Kumru says.

“If productivity is increased with that money, the economic pie becomes larger, and more people benefit from it.” 

Taxing the wealthy also helps to reduce societal inequality.

“The stage three tax cuts will provide relief for many low- and middle-income households, which are already using their limited savings to survive against mortgage payment and rent increases,” Kumru says.

“Too little taxation of the rich can lead to highly unequal societies.”

While Australia is making progress in this space, the benefits of taxing the wealthy are already evident in nations such as Finland and Sweden.

“If we want to benefit society by taxing the rich more, we must distinguish between the productive and unproductive members of the top one per cent.”

Dr Cagri Kumru

“Nordic countries with high taxation on top income earners and comprehensive welfare systems have managed to achieve healthy economic growth, which challenges the notion that high taxation necessarily hinders growth,” Kumru says.

Solving the tax puzzle

If hiking taxes on the rich has science-backed benefits, why isn’t every government on Earth doing it?

Acting too quickly to raise taxes without proper processes in place would do more harm than good, Kumru explains. 

“If the rich face unrestrained tax increases, they might scale back investments or even jet-off to tax havens –which can slow down economic growth and affect the entire population,” Kumru says.

“It would not be sustainable long-term, potentially leading to negative impacts on innovation and creativity, discouraging risk-taking and driving talent away.

“This does not mean governments should give up on this idea, but to solve the tax puzzle they must understand who the rich are and how productive their wealth is.”

In reality, becoming a billionaire isn’t always about inheriting a family empire—as shows like Succession would have us believe. Many high earners are hard-working entrepreneurs who are crucial to the economy.

“While there are plenty of individuals sitting on unproductive riches, a lot of successful entrepreneurs don’t have a large capital base but are generating high incomes through innovative ideas and debt financing,” Kumru says.

“I don’t see a significant issue with high taxation on the former. However, if entrepreneurs contribute to economic growth, tax policy should incentivise rather than penalise them.”

Creating a fairer future

Finding an optimal tax rate is the key to boosting government revenue without squeezing the rich too hard or widening inequalities, Kumru says.

“This is an exceedingly challenging task. Despite our economic models being technically complex, they are still in their infancy compared to the intricate complexities of the real world.”

But the use of artificial intelligence (AI) could be part of the solution. 

“With the aid of AI, we may be able to significantly improve tax policy decision-making and move closer to finding an optimal solution,” Kumru says.

The researcher is also an advocate for a future where both income and wealth are taxed. This idea would be a game changer in countries such as Australia, where the richest households have an eye-watering 44 per cent of the nation’s wealth. 

“A wealth tax approach would help create a more equal society without discouraging productive capital and driving away highly talented individuals,” he says.

“If we want to benefit society by taxing the rich more, we must distinguish between the productive and unproductive members of the top one per cent.

“By doing so, we can address the factors that perpetuate inequality, while also nurturing the innovation and entrepreneurship that drives economic progress.”