estate tax may reduce savings, and the reduction in savings and capital accumulation will lead to a lower ratio of capital to labor); this greater scarcity of capital will increase the return to capital and, under certain assumptions, increase the share of income that goes to capital. Assuming that capital is more unequally distributed than labor, the result will be higher inequality of income.
Here goes:
Not sure what estate tax refers to, but basically the more tax you pay, the less savings you have as you use savings to pay for the taxes.
The you need savings to buy capital, so the less savings you have the less you can spend on capital.
Then since less people invest in capital there will be less capital and then the people who would have owned capital now have to work to earn that money so labour will likely increase, therefore there is a decrease in the capital to labour ratio.
The the return on capital will increase. This is basic demand and supply, the demand remains the same, but the goods produced by the capital will be less, therefore the price will increase and assuming the cost of the capital remains more or less the same, the increase in price will result in a higher return on capital.
The the assumption is made that existing capital is unequally distributed. This is basically because the rich generally already own capital and therefore will continue to make money from it as they do not need to save to buy capital to enter the market. Whereas the poor or those who do not yet own capital, will need to save to buy capital, but because they can't save due to the additional taxes they won't be able to buy capital. Therefore the rich will get richer (due to the increase in return on capital) and the poor will get poorer as they won't be earning any extra money and will be paying extra.
Anyway, that the basic idea. It's not definite though. It depends then on what is done with the additional taxes. If these are used in a way to help those who don't have capital, then it won't lead to inequality. But that's just my own little bit added extra and is based on lots of ifs.
Let me try and break this down.
Firstly when you have life savings, eventually you'll have to pay estate tax on that and your savings wil reduce as well as the capital that you have accumuluted (i.e. the wealth, which can be cash or assets because you are paying tax on this).
Therefore if you have less capital in an economy (which is what they refer to with capital accummulation as a whole too) then the ratio of the amount of labour to capital will be lower.
When they speak of inequality of income, they are speaking of how income is distributed. Now as far as I understand this statement what they mean is that because businesses and business owners will need to have to pay more tax in the end, they will save more capital and pay their labourers less. I.e. increasing the inequality of income, the poor will stay poor and the rich will keep their capital.
capital is what someone or something(like a business) is worth. having the capital go up will lower the rate people work(decreasing labor). but the rarity of capital will mean less people will have a chance to raise their own capital and the people or businesses that have the good high capital will see an increase. and the inequality is common, businesses want to make more money so they take more of the capital(money) keep it for themselves while paying ppl less. i think i got it haha i tried at least haha
There seems to be quite a few answers. So I am not going to answer the question persay rather then just tell you they can save all the hassel of estate taxes by investing in an insurance policy. Why pay estate taxes when you can pass all of the estate tax free. And if you set the property, liquid assets, and any tangible assets into a trust you can take the insurance policy out of the trust and avoid probate along with estate taxes.
Thanks guys ! i didnt get a chance to use this stuff in my economics presentation, but i actually understand it now :)
ration of capital to labour
lol kinda
