An extensive new study shows the case for keeping taxes low on the rich is weak, and that ‘trickle down’ economics will not pave the way to post pandemic recovery.
In fact, the paper, by David Hope of the London School of Economics and Julian Limberg of King’s College London, found such measures only really benefit those directly affected, and do little to promote jobs or growth.
How was the research carried out?
The authors looked at data on income, capital and assets from 18 OECD countries, including the US and UK over the past half century.
Their findings show this was a period of falling taxes on the rich in these advanced economies. And that cuts were spread across countries throughout the observation period, but were particularly clustered in the late 1980s.
Dr Hope said:
“Major tax cuts for the rich since the 1980s have increased income inequality, with all the problems that brings, without any offsetting gains in economic performance.”
And the paper itself states that, although these reductions:increase the top 1% share of pre-tax national income in the years following any reform:
“...economic performance, as measured by real GDP per capita and the unemployment rate, is not significantly affected by major tax cuts for the rich. The estimated effects for these variables are statistically indistinguishable from zero.”
The oft-cited argument that labour supply could be affected is also challenged, as the report finds:
“... the effects of growth and unemployment provide evidence against supply side theories that suggest lower taxes on the rich will induce labour supply responses from high-income individuals (more hours of work, more effort etc.) that boost economic activity. They are, in fact, more in line with recent empirical research showing that income tax holidays and windfall gains do not lead individuals to significantly alter the amount they work.”
“The authors conclude that cuts for rich people breed inequality without providing much of a boon to anyone else, an d that this could add to the case for the wealthy to bear more of the cost of the coronavirus pandemic”.
How does this reflect on the UKs recovery?
The UK is set to suffer the worst economic decline in 300 years, but Hope said, in a recent interview:
“Policy makers shouldn’t worry that raising taxes on the rich to fund the financial costs of the pandemic will harm their economies,”
Rishi Sunak’s recent announcement on freezes to public sector pay as a solution, then, is concerning. Not only does this indicate a shift back towards austerity (which top economists agree doesn’t work), but it also carries an expectation that key workers bear this burden.
It shows a real reluctance, on Sunak’s side, to consider tax rises as a way to repair the country’s public finances - or put in place measures which might impact higher-earning individuals.
At the same time, the Wealth Tax Commission concluded, just last week, that the economy could weather a one-off 5% tax on wealth.
Dr Limberg, Lecturer in Public Policy at King’s College London, said:
“Our results might be welcome news for governments as they seek to repair the public finances after the COVID-19 crisis, as they imply that they should not be unduly concerned about the economic consequences of higher taxes on the rich.”
Certainly, while the UK faces dual economic threats from Coronavirus and a ‘no deal’ Brexit, we hope Mr Sunak is listening. Because the effects on the greater share of the UK population, if he rejects the findings of such a conclusive study, could be devastating.