Taxes
Fifty Years of Tax Cuts for Rich Didn’t Trickle Down, Study Says
ByDecember 15, 2020, 6:01 PM CST
Paper looks at fiscal policies in 18 countries over 50 years
Governments shouldn’t worry about taxes on rich, author says
That's Debatable: Is It Time to Redistribute the World's Wealth?
Tax cuts for rich people breed inequality without providing much of a boon to anyone else, according to a study of the advanced world that could add to the case for the wealthy to bear more of the cost of the coronavirus pandemic.
The paper, by David Hope of the London School of Economics and Julian Limberg of King’s College London, found that such measures over the last 50 years only really benefited the individuals who were directly affected, and did little to promote jobs or growth.
“Policy makers shouldn’t worry that raising taxes on the rich to fund the financial costs of the pandemic will harm their economies,” Hope said in an interview.
That will be comforting news to U.K. Chancellor of the Exchequer Rishi Sunak, whose hopes of repairing the country’s virus-battered public finances may rest on his ability to increase taxes, possibly on capital gains -- a levy that might disproportionately impact higher-earning individuals.
U.K. Urged to Levy $350 Billion Wealth Tax to Fund Pandemic
It would also suggest the economy could weather a one-off 5% tax on wealth suggested for Britain last week by the Wealth Tax Commission, which would affect about 8 million residents.
The authors applied an analysis amalgamating a range of levies on income, capital and assets in 18 OECD countries, including the U.S. and U.K., over the past half century.
Their findings published Wednesday counter arguments, often made in the U.S., that policies which appear to disproportionately aid richer individuals eventually feed through to the rest of the economy. The timespan of the paper ends in 2015, but Hope says such an analysis would also apply to President Donald Trump’s tax cut enacted in 2017.
“Our research suggests such policies don’t deliver the sort of trickle-down effects that proponents have claimed,” Hope said.
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The Economic Consequences of Major Tax Cuts for the Rich
David Hope, Julian Limberg Working Paper 55
December 2020
6. Conclusion This paper uses a two-stage process to estimate the causal effects of major tax cuts for the rich on economic outcomes. First, we identify instances of major reductions in tax progressivity by looking at substantial falls (greater than 2 standard deviations) in a new, comprehensive indicator of taxes on the rich that covers 18 OECD countries from 1965 to 2015. Second, we apply a nonparametric generalization of the difference-in-differences indicator that implements Mahalanobis matching in panel data analysis to estimate the causal effect of major tax cuts for the rich on income inequality, economic growth, and unemployment.
We find that major tax cuts for the rich push up income inequality, as measured by the top 1% share of pre-tax national income. The size of the effect is substantial: on average, each major tax cut results in a rise of 0.8 percentage points in top 1% share of pre-tax national income. The effect holds in both the short and medium term. Turning our attention to economic performance, we find no significant effects of major tax cuts for the rich. More specifically, the trajectories of real GDP per capita and the unemployment rate are unaffected by significant reductions in taxes on the rich in both the short and medium term. Our results have important implications for current debates around the economic consequences of taxing the rich, as they provide causal evidence that supports the growing pool of evidence from correlational studies that cutting taxes on the rich increases top income shares, but has little effect on economic performance (Lee and Gordon, 2005; Piketty et al., 2014; Roine et al., 2009). They also align with the causal findings in Rubulino and Waldenstrom (2020), but provide stronger and more generalizable conclusions, as our approach allows us to move beyond looking at tax changes in only handful of selected countries.
There are several potentially fruitful avenues for future research that come out of our analysis. While our choice of dependent variable (including both capital and labour income) makes it less likely the results are being driven by tax shifting or avoidance, we do not specifically test the mechanisms at work. Follow up research could therefore assess whether the macroeconomic effects we find are being driven by the mechanism outlined in Piketty et al. (2014), which is that lower taxes on top incomes induce the rich to bargain more aggressively to increase their own rewards, to the direct detriment of those lower down the income III Working Paper 55 Hope, Limberg 22 distribution. The analysis could also be extended outside of the OECD to see if the findings hold in countries with lower fiscal capacity. Lastly, from a policy perspective, it would also be important to understand more about the extent to which individuals’ attitudes to taxing the rich are influenced (or not) by the provision of new information about its economic consequences.
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