Data spanning 50 years and 18 countries shows lowering tax rates for the wealthy increases inequality.
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 did not pay for itself, failed to stimulate long-term growth and did not 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. A London School of Economics report by David Hope and Julian Limberg examined five decades of tax cuts in 18 wealthy nations and found they consistently benefited the wealthy but had no meaningful effect on 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 are 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 said 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-era tax cuts of 1981 and 1986, which dramatically reduced the top income tax rate from 70 percent 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.
Their results appear in visual form below.
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 percent increased by about 0.8 percentage points. (For comparison, in the United States the bottom 10 percent of earners capture only 1.8 percent of the countrys income).
But they had no effect on economic growth or employment. Though those quantities fluctuated slightly after the major tax cuts that were 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 said. Piketty, a French economist, wrote Capital in the Twenty-First Century, a 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 in their report.
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 nations 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 liberal 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, the study authors said via email.
Given the historically low tax burdens on the wealthy in the United States, their ability to pay for higher taxes has probably never been better.