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.