One way that progressive liberals argue in favor for higher tax rates on upper income earners is the observation that higher income households save a larger share of their income than do middle- and lower-class households. As such, the government should tax them more heavily and then distribute the funds to lower-income households who are more likely to spend the money. In their view, economic growth results when a greater share of the economy’s wealth is spent on consumption, rather than saved.
This article by the Mises Institute’s Dan Sanchez, however, exposes this line of thought for the wrong-headed fallacy that it is. The article, entitled “How Savings Grows the Economy”, is based on a 1980’s comic that clearly and concisely uses the example of three men stranded on a desert island to explain how savings form the foundation for a “virtuous cycle of growth”.
Saving (delaying consumption) supports more capital goods, which boosts productivity, which creates more to save, and around he goes…..This Cycle of Growth, by the way, is the way living standards rise in a complex market economy as well.
Savings and capital benefit everyone, not just the saver and capital accumulator. The Cycle of Growth lifts the entire community. And so when egalitarianism and plunder discourage saving, it keeps the entire community down, hurting not only the savers, but everyone who might have exchanged with the savers.
The article is an excellent primer for the layman to understand how an economy grows, and to see through the progressive fallacies of encouraging consumption. Simply put, society can not consume its way to prosperity.