As nations reset their economies following the Covid crisis, one focus is on reducing the inequality that has become an increasing threat to political stability. An obvious instrument to achieving this is higher taxes on the rich. However, conservative economists say we must keep taxes on high income earners relatively low in order to encourage investment, job creation and a growing economy.
Is this true? Does the trickle down theory work? A recent study, The Economic Consequences of Major Tax Cuts for the Rich, by the London School of Economics and Kings College London examined exactly that question. Using data from 18 advanced countries covering the last fifty years, the study considered the effects of major tax cuts for the rich on inequality, economic growth and unemployment. Their results showed that the tax cuts substantially increased inequality but had no significant effects on either GDP per capita or the unemployment rate.
There was little if any trickle down. Governments need not worry that higher taxes on the rich might adversely affect their country’s economic performance. They are free to create more equitable tax structures, and therefore more equitable economies, without fear of harming either GDP growth or employment. Only ideology will get in the way.
This study is not unique. A growing body of work shows little correlation between higher top marginal income tax rates and adverse effects on economic growth. It’s time to bury supply-side theories and neo-liberalism, and return to the more equitable societies we had prior to the 1980s