Study:Trickle-down tax cuts benefit rich, not economy

President Donald Trump sold his 2017 tax cuts as “rocket fuel” for the economy, arguing that freeing up money for the wealthy would allow them to hire more workers, pay better wages and invest more. The tax savings, in other words, would trickle down from the rich to everyone else.

But, just as many economists predicted, slashing individual, corporate and estate tax rates was mostly a windfall for big corporations and wealthy Americans. The Tax Cuts and Jobs Act didn’t pay for itself, failed to stimulate long-term growth and didn’t lead to sustained business investments.

According to one of the most comprehensive studies to date on tax cuts for the rich, this should come as no surprise. David Hope and Julian Limberg of the London School of Economics examined five decades of tax cuts in 18 wealthy nations and found they consistently benefited the wealthy but had no meaningful effect on either unemployment or economic growth.

The researchers started by constructing a composite measure of “tax cuts on the rich” encompassing a variety of taxes, including the top tax rate on personal income, the estate tax and the tax on capital gains. Because these taxes are levied predominantly on the wealthiest members of society, the wealthy stand to gain the most when they’re cut.

While previous studies on the effects of taxing the rich have tended to focus on just one type of tax, “our measure combines all of these important taxes on the rich into one indicator,” Hope and Limberg wrote in an email. “This provides a more complete picture of taxes on the rich, but it also allows for comparisons across countries and over time.”

Using this measure, they set out to identify “major” tax cuts on the rich in 18 wealthy nations from 1965 to 2015.

In the United States, that included the Reagan tax cuts of 1981 and 1986, which dramatically reduced the top income tax rate from 70 percent down to 28 percent after fully taking effect.

They then traced what happened to those nations’ economies in the five years after the cuts were implemented.

They focused particularly on income inequality, economic growth as measured by gross domestic product, and the unemployment rate. They aggregated those trends across countries to capture the broadest possible picture of the tax cuts’ effects.

First, the tax cuts succeeded at putting more money in the pockets of the rich: the share of national income flowing to the top 1% increased by about 0.8 percentage points (for comparison, in the U.S. the bottom 10% of earners capture only 1.8% of the country’s income).

But they had no effect on either economic growth or employment; though those quantities fluctuated slightly following the major tax cuts studied, the effect was statistically indistinguishable from zero. The “rocket fuel” so often promised by supporters of these tax cuts? It fizzles out time and time again.

“In the last decade, especially with the pioneering work of Thomas Piketty and his co-authors, there has been a growing consensus that tax cuts for the rich lead to higher income inequality,” Hope and Limberg wrote via email. Piketty, a French economist, wrote “Capital in the Twenty-First Century,” an influential book on the growth of inequality in rich nations.

Given the evidence, why are such targeted tax cuts perennially popular among policymakers, especially Republicans? The authors point to one major reason: the power of wealthy individuals and corporations to set policy agendas through lobbying and campaign contributions.

“There is a large political science literature on the power of rich voters and organised business interests to shape public policies in their favour,” the authors write.

Hope and Limberg say their findings offer one clear pathway for policymakers looking to dig their way out of the financial hole created by the coronavirus crisis: Make the rich pay for it.

Though the pandemic cost tens of millions of Americans their jobs and sent the U.S. economy into a tailspin, many at the top of the income distribution have seen their wealth skyrocket. The nation’s 651 billionaires saw their net worth spike by more than $1 trillion during the first nine months of the pandemic according to Americans for Tax Fairness, a progressive group advocating for higher taxes on the wealthy.

“We would argue that governments should not be unduly concerned that taxing the rich will harm their economies when deciding how to pay for the costs of COVID-19,” they wrote via email.

Given the historically low tax burdens currently enjoyed by America’s wealthy, their ability to pay for higher taxes has probably never been better.