Do Tax Cuts for the Rich Boost Growth?This New Study Says Not
Liz Truss’ proposal to end the cap on bankers’ bonuses is unlikely to spur economic growth, reports Sam Bright
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Liz Truss has entered Downing Street pledging to cut taxes – expected to imminently announce the reversal of the Government’s increase in National Insurance (known as the ‘health and social care levy’).
Her tax plans, in particular, seem to be focused on the rich. Reversing the increase in NI will benefit the richest 10% of Brits by £93.19-a-month, compared to just 76p-a-month for the poorest 10%. Truss also plans to reverse proposed increases to Corporation Tax – a move that would similarly benefit larger, profitable firms.
Truss’ economic theory, it seems, is that Britain should not be taxing “wealth generators” – a phrase used throughout the Conservative Party’s last 12 years in office. If the profits and income of the super rich are reduced, the theory goes, they will be less likely to spend and invest – and more likely to move their cash abroad.
While Truss has pledged a huge spending package to insulate Brits from energy price rises this winter, she intends to impose the cost of this support on the state, rather than taxing the windfall profits of energy firms. “You can’t tax your way to growth,” the new Prime Minister has repeatedly said in recent weeks.
In the same vein, a new wave of deregulation in the financial sector has been mooted – attempting to replicate the ‘big bang’ reforms seen during Margaret Thatcher’s time in office during the 1980s. Truss has pledged to empower the City of London “to drive economic growth” through tax cuts and deregulation, and has described the Square Mile as the “jewel in the crown of the UK economy”.
It has been widely reported today that Chancellor Kwasi Kwarteng will lift the cap on bankers’ bonuses imposed in the wake of the 2008 financial crash – a policy supported by major Truss donor Lord Michael Spencer.
However, a report published in January by the Socio-Economic Review dispels the logic of Truss’ approach. Written by Dr David Hope and Dr Julian Limberg, of King’s College London, their results “show that economic performance, as measured by real Gross Domestic Product (GDP) per capita and the unemployment rate is not significantly affected by major tax cuts for the rich. The estimated effects for these variables are statistically indistinguishable from zero”.
The altruistic logic of growing the wealth of the rich is that they pay more taxes and hire more employees – growing the pie for everyone, even the poorest.
However, the findings of Dr Hope and Dr Limberg challenge this theory. The findings “also show little support for the influential political-economic idea that tax cuts for the rich ‘trickle down’ to boost wider economic performance,” they write.
Even The Economist, which subscribes to relatively mainstream, neo-liberal economic ideas, doubts the logic of Truss’ tax cuts. “The risk is that her formula will depend too much on a cartoonish mixture of tax cuts, deregulation and Brussels-bashing,” its leader column observes this week. “If she opts for a pastiche of 1980s-style policies, slashing taxes and red tape and not much else, then she will be remembered as a reactionary, not a radical.”
Dr Hope and Dr Limberg also note that “windfall gains and tax cuts targeted at the top decile [10%] of the income distribution do not lead individuals to significantly alter the amount they work”.
A definitive economic impact of tax cuts, however, is heightened inequality, the academics conclude. “Our results show that major tax cuts for the rich increase income inequality in the years following the reform,” the report states.
This is certainly what happened during the Thatcher years. Under the ‘Gini coefficient’, an internationally-applied way of measuring inequality, a score of one would be a completely unequal society, while zero would be completely equal. Britain’s Gini score rose from 0.253 to 0.339 by the time Thatcher resigned in 1990.
Since the start of the pandemic, average pay in the finance sector, disproportionately concentrated in London, has increased by 31%, while the rest of the population suffers from a real wage cut, amid rapidly rising inflation. It seems that a new era of inequality is already upon us.