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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.
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Duh.
Ditto
Putting more money in the hands of the wealthy MIGHT lead to “capital formation”, and it might lead to people owning two or three homes, golf courses, boats, airplanes, and gold-plated fixtures like a certain real estate Developer-in-Chief.
What? St. Ronnie sold us a bill of goods? Shocked! Shocked, I tell you!
This has been well-documented since the 80s. Why the poorly educated, white Trumpers continue to drink the Koolaid is a complete mystery. The trickle from trickle down economics only trickles to the 1%.
How can this be turned around. It is contributing to the further erosion of our democracy. Is this socialism for the rich?
Wow, for readers of a business journal, you are so gullible. People who create jobs also create wealth. Keep drinking the communist kool-aid. This rag is a socialists dream.
Feel free to refute the study …
Jef P. , You have spoken like one who has consumed his fair share of post-fact cool-aid.
“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.”
Lol
The problem James with their solution is that are only a few wealthy and many poor or moderate-income earners so how are the rich going to pay for it? I am not one of the rich but we have to be practical in how we approach the problem. Why do we always discuss how the government can raise more money to pay for a never-ending appetite that is never satiated? Should we not look at controlling government spending and reducing our reliance on Big Brother and all of its reach? I fear we are too far down the path and Americans cannot accept individual responsibility and self-reliance but every time there is a natural disaster, health scare, social unrest, or stock market crash the puppets that are the citizens of this once proud nation come running with their hands out, hoping Uncle Sam will give them some consideration to make it all better. Then we vote into Congress more idiots who play to the masses and thus we get what we deserve. I think it is hopeless.
The other way to frame it is that the government has implemented economic policies that work against the workers best interests for several decades. What we’re slowing turning into is a third-world “democracy” where a few people have all the money, there’s no middle class, and the masses are very angry because the system is rigged against them.
If you’re truly concerned about “socialism”, then vote for increased wage laws, better childcare options, and better health-care policies and take the wind out of the sails of the “radical left”.
And if you want to reduce government spending, how about stop allowing companies like Wal-Mart or Amazon to pay their workers so little that the company owners get obscenely rich while their workers are on government assistance programs? That’s a government subsidy right there… and those companies now pay very little in taxes. Amazon, after a couple years of getting a federal tax *refund*, paid all of $162 million dollars in taxes on their 13.9 billion in earnings last year. (https://www.cnbc.com/2020/02/04/amazon-had-to-pay-federal-income-taxes-for-the-first-time-since-2016.html)
Why do I think people have to seek assistance? Because they can barely make ends meet (wage growth for many workers has been non-existent the last few decades) and their existence is just that fragile. One car crash, one illness, one pandemic that wipes out their job, and they need help. And there are plenty of stories of people who had savings going into the pandemic… but those have been wiped out in the past nine months.
^^^This. Well said, Joe.
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I seem to recall an analysis that said if Mickey D’s paid all its workers $15/hour, the price of a burger might go up some small amount (like 25-50 cents). Fine with me if it cuts down on food stamps and rent assistance.
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Henry Ford, no friend of labor, realized that his workers could afford his cars if he paid them a decent wage…which lifted generations of auto workers into the middle class.
Look, the reality is we’re all going to pay.
Either companies pay people a real living wage so they can try to figure out their own benefits like health care and retirement …
Or companies are going to pay in taxes for people to have all those things via the government.
End result either way is the same.
correct Joe B. https://tinyurl.com/yb9f2clz ,this Rand Corp study says $50T transferred to the top 1%. it’s national income accounting: GDP = national income = national output. Problem is the money from larger federal deficit must be spent or granted for uses that improve GDP preferably for long term benefit like education, healthcare and public infrastructure. using tax cuts for stock buybacks and dividends or purchasing stocks in the secondary market of the NY stock exchange does nothing for incomes of 99%. Our problem are 2 income imbalances: domestic labor vs capital return and foreign current account deficit. this per Zoltan Pozar, Credit Suisse. sometimes called the ‘Savings Glut’. this also why interest rates are at 0. Fix the income imbalances. this will result in enlarging the middle class to be the largest quintile of population, think bell curve. my belief is that a large middle class results in moderate and centrist politics not populism.
According to the Washington D.C. based Tax Foundation, there are over 14.7 million words in the current Federal tax law that begins with the Internal Revenue Code (IRC), enacted by Congress in Title 26 of the United States Code (26 U.S.C.). Some will challenge this number, which is irrelevant to the simple fact that “THE CURRENT U.S. TAX CODE IS CORRUPT”. Due to its length and complexity, it is simply a corrupt approach to taxation, regardless of who pays how much. It is the reason that large corporations pay less than they should pay. The tax code legitimizes corporations and individuals that make staggering sums of money paying minimal taxes on the income. They are operating completely legally, but all laws, like the tax code, are enacted by congress, so we have our U.S. House of Representatives and U.S. Senators to blame for the corrupt tax code. They like this system just the way it is because lobbyists of countless special interests funnel money to the politicians election campaigns which enables the politicians to accrue massive “war chests” of funds to stay in power and accumulate more wealth. Meanwhile, they keep the masses bickering with each other as to who should pay how much, etc., just like you can observe in the IBJ Comments online. The unelected bureaucrats that enforce the corrupt U.S. tax code (IRS) also like this system as they can enjoy a well paid, life-time career with an excellent retirement, by enforcing the corrupt U.S. Tax Code, and making criminals out of many citizens that don’t hire the establishment tax “consultants” (attorneys and accountants) that weed through the corrupt Tax Code on behalf of their clients. They also like this system just as it is, corrupt. We need a flat tax of some form, like a consumption tax. A sales tax on everything. The more you consume (buy) the more you pay. No exemptions and no tax breaks. Want that third vacation home in Aspen? Then you will pay the sales tax. This is how “the wealthy” should pay more taxes. Want to live frugally and spend as little as possible? Then you will pay less “consumption tax”. THE TAX CODE IS CORRUPT AND NEEDS REPLACED WITH A ONE PAGE TAX STATUTE THAT DOES NOT EXCEED 500 WORDS. We need to put the IRS employees, tax attorneys, and tax accountants in the unemployment line. This has a less then 1% probability of happening.