‘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 Milestone

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

New EU rules ensure better protection for 120 million holidaymakers this summer

European Border and Coast Guard: 10 000-strong standing corps by 2027

Google succumbs unconditionally to EU’s “right to be forgotten” ruling

COVID-19 will hit the developing world’s cities hardest. Here’s why

Tributes for ‘role model’ former UN refugee agency chief, Sadako Ogata

The big five EU telecom operators in dire straights

AI can wreak havoc if left unchecked by humans

Clamp down on illegal trade in pets, urge Public Health Committee MEPs

As conflicts become more complex, ‘mediation is no longer an option; it is a necessity’, UN chief tells Security Council

We are ‘burning up our future’, UN’s Bachelet tells Human Rights Council

Hydrogen isn’t the fuel of the future. It’s already here

5 ways COVID-19 has changed workforce management

Terrorism and migrants: the two awful nightmares for Europe and Germany in 2016

EU job-search aid worth €2 million for 500 former shipbuilding workers in Spain

France pushes UK to stay and Germany to pay

Where EU air pollution is deadliest

China rare earth prices soar on their potential role in trade war

Harmonised Unemployment Rates (HURs), OECD – Updated: February 2020

UN spotlights wellbeing of seafarers on International Day

‘Much more’ can be done to raise awareness about the plight of persons with albinism: UN chief

UN-backed intercultural dialogue forum urged to keep working to ‘bridge gap between the like-minded’

EU joint response to disasters: deal reached with Council

Combatting terrorism: Parliament sets out proposals for a new EU strategy

This South Korean city once had the biggest coronavirus outbreak outside of China. Now it’s reported zero new cases

Commission moves to ensure supply of personal protective equipment in the European Union

5 crises that could worsen under COVID-19

Finland has just published everyone’s taxes on ‘National Jealousy Day’

ITU Telecom World 2017: exploring smart digital transformation

European Parliament calls on Russia to end occupation of Georgian territories

5 neuroscience hacks that will make you happier

RescEU: MEPs vote to upgrade EU civil protection capacity

All for equality – 2020 is a pivotal year for Gender Equality

Deeper reforms in Korea will ensure more inclusive and sustainable growth

UN Climate Action Summit concludes with insufficient EU and global pledges

Milk, fruits and vegetables distributed to schoolchildren thanks to EU programme

China’s cities are rapidly becoming more competitive. Here’s why

Security Council must ‘come together’ to address the plight of children trapped in armed conflict, says UN envoy

EU Migrant Crisis: Italian Coast Guard Headquarters and Italian Navy to give host national opening addresses at Border Security 2016 in Rome

New EU-UK agreement is welcome but thorough scrutiny remains, insist lead MEPs

Coal addiction ‘must be overcome’ to ease climate change, UN chief says in Bangkok

EU27 leaders unite on Brexit Guidelines ahead of “tough negotiations” with Theresa May

How to get young people in Europe to swipe right on voting

This is Amsterdam’s ambitious plan to turn its transport electric

Reforms in Latvia must result in stronger enforcement to tackle foreign bribery and subsequent money laundering risks

Parliament boosts consumer rights online and offline

What is systemic racism, and how can we combat it?

EU Council approves visa-free travel for Ukraine and cement ties with Kiev

Powering a climate-neutral economy: Commission sets out plans for the energy system of the future and clean hydrogen

Marginalized groups hit hardest by inequality and stigma in cities

OECD joins with Japan to fight financial crime by establishing new academy

The business case for diversity in the workplace is now overwhelming

EU Parliament and Council: Close to agreement on the bank resolution mechanism

Poor quality is healthcare’s silent killer. Here’s what we can do about it

ECB asks for more subsidies to banks

Global trade is broken. Here are five ways to rebuild it

Intervene, don’t overthink – the new mantra of systems design

We need natural solutions to fight ocean and climate risk

EU Parliament: No EU-US trade agreement without safe data

The MWC14 Sting Special Edition

Italy and Greece zeroed their fiscal deficits, expect Germany’s response

More Stings?

Advertising

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