What would be the harm in shutting down the Government's tax collection, and just printing the money needed to help the poor, defend the country, etc.? Most people regard this question, asked nakedly, as silly, but they still vote for politicians who propose lightly-disguised versions of this policy. Part of the disguise is often a proposal to tax someone other than the person whose vote is being requested. As the old political rhyme goes:-
Don't tax you.
Don't tax me.
Tax that fellow
behind the tree.
If all taxes were abolished (and therefore taxes were no longer withheld from paychecks) everyone's next paycheck would be significantly bigger. If everyone just left the extra money in the bank, no harm would be done (but on the other hand no good would be done either). But that would not happen. Most people would go out and spend part of the extra paycheck. Just as an example, some people who normally buy hamburger would instead buy filet mignon.
Because a steer contains a fixed amount of filet, more steers would have to be slaughtered to meet the increased demand. On the other hand, much hamburger would go unsold both because demand had dropped and because of the extra steers being slaughtered. Since they have to throw away the hamburger, the supermarket would have no choice but to raise the price of filet mignon. In other words there would be inflation.
One might hope that the inflation would be small enough to leave a net benefit to the population, but that has not been the case when these policies are tried. The Weimar government famously tried this in Germany in the 1920's, Lyndon Johnson tried it in the US in the 1960's, and Robert Mugabe is trying it now in Zimbabwe. In all cases, the results have been disastrous, though in the US the 'reserve currency' status of the dollar postponed the worst effects until the 1970's.
The purpose of taxation, then, is to persuade people to reduce their demand for consumer goods to the point where it does not cause unwanted inflation.
Given that the government must collect taxes, who should it collect them from? The pleasant-sounding answer is "from those who can afford it". Unfortunately, what that actually means is "those people who can pay the tax without reducing their consumption". If you accept that taxes are levied to reduce consumption, then taxes on the rich are futile. No tax ever seriously proposed in the United States would persuade Bill Gates to eat hamburger if he wanted filet mignon.
Perhaps a clearer example is Ross Perot, who founded EDS, sold it to GM for many billion dollars, and invested the proceeds in government bonds. Clearly, if his taxes were increased, he would not say to himself "ah well, it was nice to be able to eat filet, but now I'll have to go back to hamburger" but would simply sell off some of his government bonds to pay the taxes, which the government would then use to buy the bonds. In other words, it would be purely a bookkeeping operation, totally without effect in the real world.
The "pay as you go" principle often quoted by left-wing politicians as a demonstration of fiscal virtue is therefore bad economics. To examine its effects, let us suppose they pass a bill confiscating all Bill Gates' wealth, and distributing one hundred shares of Microsoft to every American. This is entirely consistent with the principle, but what would actually happen?
The majority of Americans would immediately try to sell the stock they got. (The fact that this would overwhelm the people who want to buy these shares, thus depressing the price, would no doubt be attributed to the "vast right-wing conspiracy", or as the Brazilians say "if shit had value, the poor would not have assholes".) They would then rush out to buy filet mignon, causing inflation.
If taxing the rich has no effect, should we just tax them as a moral gesture toward equality?
I do believe that the government should view the rich in much the same way a farmer views his geese that lay golden eggs. The wise farmer takes as much as possible over the long term: he coddles the goose and does what he can to help it lay more eggs, but does take the eggs once they're laid.
Rather than talk of 'the rich' in general, I find it easier to take one well-known example, and the obvious one is Bill Gates. He has his detractors, but the judgment of the marketplace is that the software he inspired/designed does a better job of meeting peoples' needs than any other. (With some reservations, I agree with this judgment.) Wealth that (at least to some extent) would not exist but for him has been showered on him in abundance. He himself cannot possibly spend all this wealth on personal luxuries, and in fact he is putting much effort into using it to benefit humanity at large. (It strikes me as a strange paradox that the people who call most loudly for more of Bill Gates' wealth to be transferred to the control of George Bush by way of taxes are the same people who argue most fervently that George Bush does a worse job of allocating resources than Bill Gates does.) Eventually, however, Bill Gates will die and his wealth will be gradually divided until much of it is in the hands of people whose consumption can be influenced by taxation. Should the government speed up this division by redistributive taxation?
What would have been the effect on Bill Gates of higher taxes? Ideally, I suppose, the government should have left him alone while Microsoft was growing wildly, and then confiscated almost everything when Microsoft's growth slowed down. One minor problem with this plan is that there was not a specific day on which anyone (least of all a government bureaucrat) could have said "today's the day Microsoft will stop growing so fast". A more fundamental problem with this "bait and switch" strategy is that Bill Gates is smarter than a goose, and if he saw the government confiscating the wealth of other entrepreneurs he would probably have taken steps to protect his wealth as much as possible from such actions. (This is an ongoing problem in Russia, for example. Putin decides from time to time to confiscate the wealth of some wealthy Russians, or of foreign companies doing business in Russia. Watching this, other wealthy Russians try to move as much wealth as possible out of Russia, and foreigners are reluctant to invest further. Putin denounces this "unpatriotic activity" and "foreign hostility" and uses it as an excuse for further destructive acts. Some years ago, this cycle led to the collapse of the Russian economy to the point that Russia defaulted on its debts. Right now, high oil prices conceal the problem: without oil Russia would be a basket case like Zimbabwe, where similar policies prevail.) So a better question would be, what is the best tax rate to impose on Bill Gates, constant throughout his life?
Presumably, the higher the tax rates, the more time Bill Gates would have spent talking to tax accountants trying to avoid these taxes, rather than designing the software we all use today. If we accept that the time he spent designing software had great value, this must surely be a significant loss. Arthur Laffer discussed this, drawing diagrams to illustrate the idea that beyond a certain point, raising taxes diverts so much attention away from creating wealth that less tax is collected by the higher tax than by the lower. The "Laffer Curve" was widely derided by the left-wing media, but when Ronald Reagan cut taxes on his advice, tax receipts from the wealthy began to rise, and have been growing (both as an absolute amount and as a percentage of all taxes collected) ever since.
It is fundamentally impossible to collect taxes from the rich without their cooperation. When Jack Welch retired from GE and shed his wife to marry a younger woman, his wife's divorce lawyers exposed the fantastic array of houses (with staff), apartments, corporate jets, club memberships, etc. GE had put at his disposal even after he ceased to actively work for them. Jack Welsh had acquired his habits during the pre-Reagan era of confiscatory taxes, and had set things up with GE that he would not be paid the "outrageous" salaries that younger CEOs demand, but that absolutely every penny he spent throughout his life would be considered a business expense. Today's CEOs do not live any more luxuriously than Jack Welsh, they just tell something much closer to the truth on their tax returns, thus giving the left the opportunity to complain that the rich are getting richer. It is easy to complain that Jack Welsh was evil to avoid taxes in this manner, but the complaints achieve little. Presumably these arrangements were made during the Kennedy/Johnson years, while "tax the rich" and "evil capitalists" were the slogans of those in power, so it would appear that governments are helpless to tax the rich more than they are willing to pay unless they go to the destructive extremes of Lenin, Mao, or Pol Pot. These regimes did not benefit anyone except a few politicians, so it seems that the best we can do is to accept that the rich will always be with us, and get along with them as well as possible. I think few people really believe that Bill Gates has done more damage than Pol Pot.
Most published versions of the Laffer Curve suggest that the maximum tax payments occur when tax rates are at 50%. This is not what Laffer actually said, but it is a reasonable first approximation to his ideas. If you raise the rate to 60%, the amount left for the taxpayer drops by a factor of 4/5. If you assume that the effort the taxpayer is willing to put forth is proportional to his incentive (and this is a very shaky assumption, as Laffer pointed out, but it is the simplest way of explaining his ideas) then his work will be 4/5 of his previous work, and his pretax income will be 4/5 of his previous pre-tax income. Tax rates have risen by a factor of 6/5, but this still leaves the number of dollars collected at 6/5 times 4/5 = 24/25 of the amount that would have been collected at 50%. Only a small drop, but it's not clear to me what advantage even this small drop brings to anyone.
The Reagan tax cuts left the top rate of federal income tax at 33%. Along with up to 10% each of state income and sales taxes, the total tax burden on the rich was quite close to the 50% rate suggested by "Laffer simplified". And there are of course other taxes. (Real Estate, death, etc.)
My own belief is that total tax rates of more than 50% on the rich are certainly pointless and destructive: government spending is so far out of control that the current total tax rates of about 50% on the middle class is necessary to prevent inflation: it is absurd and divisive to tax the rich less than the middle class: so we seem to be stuck with a tax system that carefully disguises the fact that it is a flat tax system with a total rate of about 50%. Of course the rich can still escape as much of the taxes as they wish, but they seem much more willing to go along with the current 50% than they were with the old 91% federal + 20% state and local.