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

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”.