A huge study of 50 years of tax cuts for the wealthy suggests 'trickle down' economics makes inequality worse

  • Large tax cuts for the rich cause higher income inequality, and don't fuel economic growth or cut unemployment, a new paper by academics from the London School of Economics and King's College London shows.
  • Their analysis of 50 years of tax cuts for the wealthy in 18 countries counters arguments that such cuts have "trickle-down" effects for the rest of the economy.
  • "Cutting taxes on the rich increases top income shares, but has little effect on economic performance," the researchers concluded.
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Large tax cuts for the rich don't lead to economic growth and employment, and instead cause higher income inequality, a new study that examined tax cuts over 50 years has suggested.

Tax cuts for the rich in 18 wealthy countries predominantly benefited the wealthy, according to a paper by David Hope of the London School of Economics and Julian Limberg of King's College London.

"Our analysis finds strong evidence that cutting taxes on the rich increases income inequality but has no effect on growth or unemployment" in both the short- and long-term, the researchers wrote.

After major tax cuts for the rich are introduced, the top 1% share of pre-tax national income increases by almost 1%, they found.

This counters arguments that tax cuts for the rich cause a "trickle down" effect that benefits other people, which the researchers noted has been part of the rationale for major tax reforms in the US.

Supporters say that tax cuts for the rich will lead to wealthy individuals putting in more hours and effort at work, which in turn will boost economic activity, the researchers said. Other arguments for "trickle down" tax cuts include that allowing the wealthy to invest more benefits the economy as a whole.

Hope and Limberg analyzed major tax cuts for the rich in 18 Organisation for Economic Co-operation and Development (OECD) countries, including the US, Japan, and Norway, between 1965 and 2015.

Top incomes have risen rapidly since the 1980s – but as they've grown, more tax cuts for the wealthy have been introduced, the researchers said.

The researchers said their results were in line with a 2014 paper published in the economic policy edition of the American Economic Journal, which suggested that lower taxes on the rich cause high earners to seek pay rises.

"Cutting taxes on the rich increases top income shares, but has little effect on economic performance," Hope and Limberg concluded.

Taxes have come under scrutiny during the pandemic as countries look for ways to fund their COVID-19 relief efforts.

Earlier this month, Argentina passed a one-off "millionaire tax" to help pay for its pandemic response. Less than one in 100 earners will pay the tax, which the government hopes will raise $3.78 billion.

Read more: With Elon Musk moving to Texas, the world's 3 richest people are set to pay a whopping $0 in state income taxes. Here's why 9 US states don't collect any income taxes.

UK experts have also called for a similar one-time wealth tax, which the Wealth Tax Commission say could raise £260 billion (just over $348 billion) in five years. 

And in July, 83 millionaires including Ben & Jerry's co-founder Jerry Greenfield and Disney heiress Abigail Disney signed a letter asking for higher taxes on the super-rich to pay for COVID-19 recoveries.

In an opinion piece for Business Insider, Max Burns, a veteran Democratic strategist, said that President Donald Trump's COVID-19 relief proposal in August, which included a 50% cut in weekly emergency unemployment payments and a proposed payroll tax cut, was "just another tax cut for the wealthy in disguise."

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