You don’t have to be a scholar to understand why it’s absurd to suggest that reducing the tax burden for rich people isn’t likely to be a particularly effective strategy when it comes to juicing economic activity.
The best way to conceptualize of this situation is simply to think about what you would do if you were rich and suddenly didn’t have to pay as much in taxes.
So, do that — i.e., think about it. You’re already rich. By definition, you don’t “need” the extra money, or at least not on any rational interpretation of the word “need.” You certainly don’t “need” it to buy food or basic necessities. In all likelihood, any additional spending will be on luxury items, but there’s a good chance you’ll just invest the windfall.
The idea (more accurately: the myth), is that some of that investment will go towards things like creating jobs or fostering innovation or capital expenditures, as though everyone who’s rich is also a business owner or otherwise in a position to hire people or conduct R&D or buy heavy machinery.
Let’s be honest: Very few rational people believe in trickle-down economics. That’s not to say no rational people promote it. It’s just to say that the rational people who do, almost always have ulterior motives, usually involving the preservation of their own wealth.
Unfortunately, millions of Americans have been duped into voting against their own self-interest in this regard for decades, as middle- and lower-income Republican voters support politicians peddling tax cuts as an economic cure-all, especially when those economic policies are bundled with hot-button social issues designed to play on the fears, superstitions, and prejudices of the undereducated.
There’s little utility in rehashing this further. I’m preaching to the choir. But I bring it up Friday because I’m running through the “checklist” of stories I keep on a yellow legal pad next to my second monitor. I try to get through that checklist each week. Sometimes, Friday is a “catch up” day. One of the stories I wanted to highlight this week, but didn’t get around to mentioning, is a new working paper by David Hope, of the London School of Economics, and Julian Limberg, of King’s College London, both PhDs.
The paper “utilizes data from 18 OECD countries over the last five decades to estimate the causal effect of major tax cuts for the rich on income inequality, economic growth, and unemployment.”
You’ll never guess what Hope and Limberg found.
I’m just kidding. Their findings are entirely predictable. Here are the main points:
- The results suggest that tax reforms do not lead to higher economic growth. The effect size of major tax cuts for the rich on real GDP per capita is close to zero and statistically insignificant. The findings are very similar when matching upon pre-treatment covariate trajectories. Major tax cuts for the rich do not lead to higher growth in either the short or medium run.
- Although the results show very slight indications of a flash in the pan effect of tax cuts for the rich on unemployment, these findings are neither statistically significant nor robust.
- The results show that major tax cuts lead to a significant increase in inequality and that this effect becomes stronger with time. Three years after the reform, the top 1% income share increases by almost 0.6 percentage points in countries with a major tax cut. Over five years, tax reforms increase the top 1% share of pre-tax national income by more than 0.8 percentage points. This effect is highly statistically significant, with P<0.0001.
Summarizing, Hope and Limberg write that “we find that major tax cuts for the rich push up income inequality [and] the size of the effect is substantial.”
Meanwhile, they conclude that there are “no significant effects of major tax cuts for the rich” on economic performance. None. “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,” they flatly declare.
And look, if you want to argue the point, feel free. Here’s the methodology:
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.
I’m being deliberately abrasive, of course. That is: I’m assuming the odds of anyone challenging the econometrics in a comment are infinitesimal. It probably is possible to dispute the methodology and, in turn, the findings, but I doubt anyone is going to do it in these pages, so I’m free to pretend as though the conclusions are indisputable, which works well because the conclusions generally fit with the narrative that underpins most of my own work on inequality. (Confirmation bias is fun!)
Jokes aside, that brings us full circle to the point made here at the outset. You don’t need this paper (and it’s embedded below, by the way) or any other academic research to understand this. You just need common sense. Trickle-down economics doesn’t work. It never has. And, like most things that fly in the face of common sense, it probably never will.
If you deliver a tax cut to the people with the lowest marginal propensity to consumer, they’ll likely just hoard the money or invest it in financial assets. As far as corporate “citizens” go, anybody who knows anything at all about corporate psychology under the so-called “tyranny” of next quarter’s earnings report, knows that the C-suite will be inclined to take advantage of tax windfalls to increase buybacks.
Of course, in addition to inflating bottom lines, share repurchases also inflate stock prices and equity-linked compensation. Stocks are overwhelming held by rich people (who can buy more of them when they have extra money thanks to a lower tax burden) and equity-linked compensation is often the purview of executives who are almost universally rich. If you lower the capital gains tax, that makes the inequality merry-go-round spin even faster.
Asked by Bloomberg if the analysis (which ran through 2015) would also apply to the Trump tax cuts, Hope said it would. “Policymakers shouldn’t worry that raising taxes on the rich to fund the financial costs of the pandemic will harm their economies,” he added.
MMT advocates will take it one step further, noting that while extracting more in taxes from the wealthy may be appropriate for a number of reasons, there’s no need to “fund” the cost of pandemic relief with money from taxpayers — rich, poor, or otherwise.
Another point lost on people is that tax cuts for the wealthy starves the Federal Government including Social Security of money. The rich by defintion when declaring additional income have already maxed out their FICA contribution. The result is that many retirees are duped into voting for ppolicies that are intended to starve the government of the funds used to finance their retirement. Stupid is a stupid does.
GOP has never been straight. Recall their party was the rich and property owners. Today it’s Wall Street and the non working rich. The US should turn against them, but they craft ways of pretending they are not fascists. Indeed the less eduacted just follow their pathetic lies and the bouncing balls.
I absolutely agree that trickle down does not work. One must not confuse lower marginal rates with lower taxes always though. Sometimes a rate cut combined with closing tax benefits or loopholes can make the tax system fairer and more efficient. There is no doubt that lower taxes total taxes on upper income individuals provide less stimulus to demand, and increase income inequality. It would be interesting to see Democrats propose a tax cut for folks earning less than 6 digits and increasing taxes on folks making mid 6 digits so that it was revenue neutral. That would cut off the argument that they were tax and spend. How would the GOP counter that one I wonder. Probably they would say the Democrats are using class warfare. (Like they did not). The lowest hanging fruit for the Democratic party is to raise the minimum wage in step over the next 10 years to $20 per hour. That would be a great anti poverty program. Walmart would not have to hand out instructions and forms for the employees to get Medicaid in that event.
The best idea is to institute a federal jobs guarantee at $20/hour and full benefits and make the private sector compete with that.
What do you think would most help to popularize this proposal and also drive both parties to implement it? I think it’s a hopeless cause if it comes from anyone inside the party system. Do we just need to get Joe Rogan on board, or what?
I’d be curious to see a similar paper examining the effects of increasing taxes. Probably harder to find the data since the last 70 years have been characterized by cutting taxes rather than raising them… it would be an interesting counterpoint.
We can refer you to the 50s and the 60s up to the mid 70s… but, again, historical comparisons are hard. You could argue special circumstances explained the prosperity back then, beyond just high taxes on the rich.
Wonder about your take on Randall Wray’s paper (an MMT proponent)
” Is It Time to Eliminate Federal Corporate Income Taxes?”
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3734445
10 or so years ago asked about tax cuts and trickle down a 1%er said he already had 2 mega Yachts and much more. Asked if worried about social upheaval said he would increase his private security force that the government was busy training/ex-military.
Last year I read of a philosopher who was making great money explaining to 1%ers that she believed that in a stark upheaval their very own security forces could easily decide that they were dispensable.
Trickle up is how the wealthy make money, besides financialization.
Non-Zero sum is the way to run a Nations wealth.
Health care and education are infrastructure. For all the complaints about college and useless degrees if just 1% of students become active geniuses the economy is well off for it.
I’d like to see the authors of this study have a conversation with non-economist Larry Kudlow on a non-Fox business channel. Yeah, that’s not gonna happen.
Also “tax cuts for the job-creators” was Maria Bartiromo’s constant refrain before she jumped ship from CNBC to Fox. Frankly I thought she made a fool of herself
Education is key. I am not sure $20 per hour jobs guarantee is the answer. What would the jobs be? I rather like paying unemployed or under employed for taking online courses and paying more $ for higher grades.
I totally agree that the tax brackets for the rich should be raised. As part of that tax bill, stock buy backs should be outlawed. I have heard selfish billionaires say they would move their business to a non tax country. So If the US was to do this it would have to be part of the G7 tax overhaul. The 50 year trickle down experiment is an abject failure. I read about this research this morning and I was glad that you saw it and discussed it. BTW I have a family member that was hired by Walmart this month to work in the warehouse for $20 an hour, so maybe they heard the argument and agreed.
I remember during my PhD studies how I would get hammered by my colleagues and professors if I cite one paper to make an argument. One needs to cite the literature on the issue, not just one paper, to make his argument valid.
I don’t dispute the conclusion of the paper. But I see how it’s methodology could be dismissed as flawed. Income inequality have been rising in the last 50 years regardless and their placebo method is an inadequate test of that. They could have counted instances of goose migration and would have found that income inequality increases five years later. 30 binary observations are hardly an impressive statistical model. Cheers to confirmation bias!! 🙂
Did you happen to scroll down and look at the sources they cited? I mean, that’s why I embedded the paper, after all.
Do note: This is the kind of comment that’s generally annoying because what this person has done in the first sentence is accused me of only citing one paper, rather than address the two PhDs who penned that paper who in fact cited 58 sources, as is clear in the bibliography.
The second paragraph in this comment is fine, but the first sentence kinda conflates me with the authors. They cited 58 sources, including Piketty by the way, who I’m sure would be more than happy to debate you on this issue until you pass out from exhaustion.
I don’t submit my posts for peer-review before publishing them.
While interesting, the study does have issues. I personally don’t care how much the rich are taxed one way or the other, but I do care that everyone else is taxed a ridiculous amount. I think it’s great that people want to give to the less fortunate, but holding a gun to a person’s head who’s a little more fortunate and forcing them to hand over 40% of their labor “for a good cause” is not what I would call making society a better place.
Well realistically… calling the income of the wealthy and ultra wealthy the results of “labor” is somewhat strange but beyond that it is even stranger that somehow cutting these taxes and relieving them of this “burden” seems to in no way at all effect their consumption habits. So what exactly are these taxes extracting unfairly? I mean someone making $50k or $25k per year is being taxed on money they need to pay for healthcare and housing and other necessities and their taxes are taken no less with a gun to head… so what really is the unfair part of this system? Bemoaning the wealthy lacking sufficient funds to buy unlimited political influence and found Dynasties is a bit much when people are literally starving, being evicted en masse and dying of plague.
Spoken as someone who’s never been at risk of being one of the less fortunate…
Besides, you’ve got the wrong idea about “giving to the less fortunate”. It’s not about charity. It’s about optimizing economic outcomes for everybody, very much the middle class and the rich and you included.
In a society where exterminating the less fortunate is not possible, making sure they’re all middle class is the best alternative. It powers economic growth and thus profit opportunities for the capitalist class (“the rich”). It also powers innovation and its spread through society, one thing being rich while everyone else is poor cannot do.
So rich people should pay taxes out of self interest, not because they’re bleeding heart givers.
The wealthy have an extreme interest in the military that protects their wealth. That the people who pay for this protection with taxes, time and blood have less of a vested interest but burden the cost is absurd.
Tax havens could and should be blockaded.
The COVID has put a lot of people on the unemployment lines that paid their taxes. All they are asking is their govt stand behind them until situations improves.
The financial aid package approved tonight allows business lunches to be written off probably the equivalent of a weekly employment benefit. Meanwhile millions are in food lineups.