‘Trickle-down’ tax cuts don’t work, study says

(Credit: Unsplash)

This article is brought to you in association with the European Commission.

  • A study claims that taxing the richest less doesn’t strengthen economies and worsens inequality.
  • London-based academics have analysed 50 years of growth, income and employment data covering 18 countries.
  • The study comes as governments are considering raising taxes to repair the economic damage of COVID-19.
  • Billionaires have seen their wealth increase by more than 27% this year to new record highs.

Tax cuts for the rich “do not have any significant effect on economic growth and unemployment”, and “lead to higher income inequality”.

Those are the central claims of a new study of 18 OECD countries. It draws on economic data from the past half century – a period during which taxes on the richest have fallen widely.

The working paper, published by the London School of Economics’ (LSE) International Inequalities Institute, comes at an important moment. Countries including the UK are being urged to use one-off wealth taxes to help repair battered public finances. Argentina has already done so.

Some economists argue that “trickle-down” economics, where greater financial headroom at the top can spur broader wealth creation, is real enough – and big tax rises are risky. Nevertheless, calls for reform are growing, and tackling inequality is high on the Davos Agenda this year.

Distribution of major tax cuts for the rich, 1965-2015
The 1980s saw a cluster of nations cut taxes on the rich. Image: London School of Economics

The long view

One of the reasons the LSE study takes a 50-year view (ending in 2015) is that so much has changed for the rich.

In their study, Dr David Hope of the London School of Economics and Dr Julian Limberg of King’s College London, point out that for several decades after the Second World War, top incomes fell.

But the 1980s brought a wave of tax cuts in countries including the US and UK, creating trends and precedents that few leaders have attempted to reverse – in fact many have continued.

Arguments by researchers that higher taxes on the wealthy had a negative influence on economic growth prevailed for many years. But Hope and Limberg claim that there is, in fact, relatively little clear data linking tax cuts and improved economic performance. This echoes analyses which have questioned the power of such tax-cutting strategies such as former US President Ronald Reagan’s’ “Reaganomics”.

Hope and Limberg’s assessment considers a range of data points, and covers the performance of economies for up to half a decade after tax cuts. Their conclusion: “estimated effects for these variables are statistically indistinguishable from zero” – or to put it another way, tax cuts make little or no difference to GDP and jobs.

Taxes on the wealthiest have fallen in many nations. Image: London School of Economics

The pandemic factor

These findings are timely because of the policy context. As Hope told Bloomberg: “Policy-makers shouldn’t worry that raising taxes on the rich to fund the financial costs of the pandemic will harm their economies.”

The pandemic has not only sharpened wealth divisions, with billionaires seeing their wealth increase by 27.5% earlier this year, and the world’s poorest suffering most. Technology entrepreneurs have seen their rising assets scrutinized in the media. And, above all, COVID-19 has increased the holes in governments’ balance sheets.

And policy appears to be catching up with research. Whereas the current US administration cut taxes by more than $1.4 trillion – benefiting the wealthiest as well as the broader “middle class” – President-elect Biden has already signalled his intention to change course, by increasing capital gains tax, for example. https://platform.twitter.com/embed/index.html?dnt=false&embedId=twitter-widget-0&frame=false&hideCard=false&hideThread=false&id=1336581584678477825&lang=en&origin=https%3A%2F%2Fwww.weforum.org%2Fagenda%2F2021%2F01%2Ftax-cuts-for-wealthy-impact-lse-study%2F&theme=light&widgetsVersion=ed20a2b%3A1601588405575&width=550px

A complex picture

However, the increasing prominence of inequality debates, led in recent years by economists such as Thomas Piketty, does not necessarily translate into a clear mood for a change.

There is evidence to suggest that the general public has a more complicated relationship with income inequality than might be supposed. A recent study has found that the way wealth is obtained is a key factor in how dissatisfied people feel about it.

Its authors say that whether the rich made their money from capital (such as owning assets) or labour (income from work) is significant. They also find that, in many countries, the gulf in salaries between the richest and poorest is now the key driver of inequality.

Their study is an indication that while wealth taxes might be rising up government agendas, it will take more than that to address growing inequality.

the sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Fleeing Venezuela: MEPs to probe humanitarian conditions in Colombia and Brazil

Endocrine disruptors: A strategy for the future that protects EU citizens and the environment

ECB intervenes to clean May’s and Schäuble’s mess

Businesses can lead a revolution in disability inclusion

Media and entertainment in flux: it’s time for the close-up

Questions directors need to ask in the age of stakeholder capitalism

‘Abhorrent’ ambulance attack in Libyan capital imperils life-saving work, warns UN

Competition: The European Commission launches a process to address the issue of collective bargaining for the self-employed

4 ways to become a ‘business baobab’ on the African economic landscape

How to Create a Clear Vision For the Future of Healthcare

China Unlimited Special Report: The trip to China

Women’s rights and how medical students can act as aides of progressive change

Syria’s Idlib ‘on the brink’ of a nightmare, humanitarian chiefs warn, launching global solidarity campaign

Social, cultural diversity ‘an enormous richness, not a threat’ Guterres declares calling on investment for a harmonious future

Commission launches initiative for more sustainable cocoa production

We need to rethink neuroscience. And you can help us

EU Parliament: Deposit guarantee and trading platform transparency sought

Palliative care and Universal Health Coverage: how to advocate for the inclusion of palliative care in UHC

Migrant caravan: UN agency helping ‘exhausted’ people home

Quantum technologies can transform innovation and mitigate climate change – here’s how

Two rhythms and a sharpened pencil: how art can help us heal and make sense of the world

‘Jerusalem is not for sale’ Palestinian President Abbas tells world leaders at UN Assembly

Gender equality in STEM is possible. These countries prove it

The vehicles of our future

4 solutions for reducing emissions from industrial clusters

Here are five tips to make your message clear in a crowded world

Business growth is key to post-pandemic recovery

To feed 10 billion people, we must preserve biodiversity. Here’s how

Palliative care effectiveness at Universal Health Care: an eminent need

From battlefields to boardrooms: 3 steps to building high-morale teams

Forget GDP – for the 21st century we need a modern growth measure

Digital Day 2021: EU countries commit to key digital initiatives for Europe’s Digital Decade

EU Charter of Fundamental Rights marks its 10th anniversary

ECB readies itself for extraordinary monetary measures defying Germany

The EU Commission fails to draw the right conclusions about corruption

Mergers: Commission announces evaluation results and follow-up measures on jurisdictional and procedural aspects of EU merger control

Human rights are everyone’s business, amid relentless crises around world: UN’s Bachelet

Commission presents far-reaching anti-tax evasion measures

Bold measures needed to protect cross-border and seasonal workers in EU, MEPs say

Why lockdowns can halt the spread of COVID-19

The megatrend that will shape our working future

EU approves disbursement of €500 million in Macro-Financial Assistance to Ukraine

Governments, businesses ‘walk the talk’ for investment in sustainable development: UN forum

The world is facing more disasters. This is how data can help us reduce that risk

Can the EU really make Google and Facebook pay publishers and media?

The future of international election observation missions

International Literacy Day: What you need to know about youth literacy

EU-U.S. trade talks – one year on, Commission presents progress report

Yanukovych attempts a violent and deadly cleansing of Kiev’s center

This country is restarting air travel. Here’s how

The public health system in Brazil as a promoter of sexual and reproductive health and rights: how does it help in the fight against HIV/AIDS?

Iran cannot be allowed to develop nuclear weapons: Israeli Foreign Minister

The end of Spitzenkandidat: EU leaders concluded unexpectedly on EU top jobs

How we planted more than 5,000 trees during the COVID-19 pandemic

MEPs list conditions for new EU-Azerbaijan deal

This plastic-free bag dissolves in water

Plastic Oceans: MEPs back EU ban on throwaway plastics by 2021

Syria’s groundbreaking constitutional talks: ‘a clear success of mediation’ says Guterres in Turkey

Human rights ‘core to sustainable development’: deputy UN chief

Focus on EU’s external action and building our stronger inner core: von der Leyen at the Special European Council

More Stings?


Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s