Tax the rich – even just a bit more
Modern economics is hampered by politics. This has huge ramifications for Covid-19 recovery and, longer-term, for society, poverty and the third sector.
The past four decades of Western economics are riddled with decadent failure. Only some people got the decadence, the failure was more widespread.
Legacies include astonishing rises in house prices, wage supergrowth for the wealthy and stagnation for everyone else, and boom times for climate change.
Raising taxes is not the solution to all our problems. There are places the public sector cannot reach, places it should not and, even in areas where it can do real good, more money isn’t always the answer.
However, good public services can be transformative. Major public investments can reshape communities for the better. In Northern Ireland – as with the whole of the UK – there are today many ways to spend more money well.
Recent budget debates in Stormont have seen near unanimity amongst MLAs who acknowledge that not only has Covid-19 shrunk finances, but it did so from a starting position of weakness. The public purse was underweight long before the pandemic.
Higher budgets could be put to great use. More money could expedite the reform of health and social care, transforming the service into something fit for the future (rather than the current model, lurching towards collapse). It could oversee a house-building programme that will reduce housing costs, reduce poverty and provide a boost to the economy via the construction industry. It could be spent on any number of green schemes, from planting trees to improving local renewable infrastructure.
Instead, Northern Ireland is struggling with even traditional, belt-and-braces governance. We don’t even have the cash to fix our potholes.
That’s all tremendous stuff, but where does more money come from? Buying good things is good – but where can we find the cash? To quote former Prime Minister Theresa May: “There is no magic money tree.”
Actually, according to Modern Monetary Theory there might actually be a magic money tree – however, leaving that (potentially transformative) thinking aside, public services could also be boosted by more traditional methods.
Something that worked before, then stopped: raising taxes on really, really, incredibly rich people. Even just a bit more.
Between the end of World War II and 1981, the top-rate marginal tax rate for private individuals in the USA was never lower than 70% (and reached a height of 92% in the 1950s). During this time, the USA consolidated its position as the world’s economic powerhouse.
Ronald Reagan was elected President on a platform dominated by economic reforms. Reaganomics was, more or less, trickle-down theory in action. The idea is, broadly, an entire economy run on supply-side measures. Put lots of money in the hands of wealthy people and rely on their investments and innovative ventures to create a boom and, from there, a rising tide will lift all boats.
The UK, under Margaret Thatcher, operated on similar principles (albeit Mrs Thatcher’s “There is no such thing as society” was more explicitly doctrinaire than President Reagan’s stated position).
It is not correct to say that this hardline orthodoxy has held to this day. In particular, third-way governments led by Blair and Clinton were much more happy to tax and spend than their conservative predecessors (and successors).
However, the 1980s cast a shadow that persists to this day. Norms were changed. Trickle down never really went away.
Late last year, the London School of Economics published research based on 50-years of economic data. Per study author Dr David Hope: “The economic case for keeping taxes on the rich low is weak.”
The paper from Dr Hope and Dr Julian Limberg found that major reforms reducing taxes on the rich lead to higher income inequality but do not have any significant effect on economic growth or unemployment.
The Economic Consequences of Major Tax Cuts for the Rich looked at data from 18 OECD countries including the UK and USA, found that the last 50 years were a period of falling taxes for the wealthy, with major cuts spread across countries and throughout the relevant decades (but, in particular, in the 1980s).
The economic boost from these tax cuts was effectively zero. The paper states that governments looking to restore public finances after Covid-19 should not be unduly worried about raising taxes on the wealthy.
Dr Hope said: “Major tax cuts for the rich since the 1980s have increased income inequality, with all the problems that brings, without any offsetting gains in economic performance.”
Per the study: “Our results have important implications for current debates around the economic consequences of taxing the rich, as they provide causal evidence that supports the growing pool of evidence from correlational studies that cutting taxes on the rich increases top income shares, but has little effect on economic performance.”
We live in a time where there are so many things that governments would like to do (or at least say they would like to do), and so many things that third-sector organisations definitely would like to do. And, yet, the resources are not available.
But they could be. Or, at least, more could be available. And more could be very useful indeed.
The LSE study is comprehensive and notable and received fairly hefty attention in the media. However, it is unlikely to precipitate any major change, because ultimately politicians set tax rates.
Moreover, this study is not some Damascene revelation. If anything, it just underlines what modern economics already believed.
In 2015, the International Monetary Fund published a paper stating “the positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups, and that the effect of tax cuts for the top 10% on employment growth is small.”
Similar results have emerged from more and more studies. In general, economic sentiments are shifting enormously. However, politics – which, in the west, is heavily influences by rich donors – has been slow to follow.
Just last week, Nobel Prize-winning economist Paul Krugman said he hoped President Biden’s plans would be the death knell for Reaganomics but, given there was never any evidence that Reagan’s approach worked, he has his doubts (see also here).
Part of this is because people don’t like taxes, are suspicious of government per se, and are sympathetic to slogans about people keeping money that has come to them through legal endeavour. All of which is fine. Nobody should worship government.
However, there is a massive difference between thinking all tax increases and spending rises are good, and all should be dismissed as terrible or perilous.
The simple fact is that it is possible to build huge taxation-funded programmes that change society for the better. And, per the studies above, it is possible to gather massive amounts of money for the public purse by heavy taxation of the very wealthy without negative economic consequences.
So transformative public works are possible, and funding them is possible. The choice is ours to make.
Top tax rates of 70% seem impossible to imagine nowadays (let alone 92%). This is the residue of trickle down, and its endless simple slogans with their easy rhetorical power.
But just as the gap between worshipping the state and hating it is huge, with plenty of possibility, so is the gap between the UK’s current top tax rate of 45% and much higher rates. Then, of course, there are other avenues where many of the truly rich gather their income (Capital Gains tax rates are much lower than highest-rate income tax).
Would tax rises solve all our problems? No. Could they significantly ease some major concerns? Yes. The possibility space is huge. Health transformation; a green economy fit for the future; fewer potholes.
Like any era, we should take the best bits from the 1980s, leave behind the worst, and learn the lessons from everything.
Keep the synth music, maybe keep some of the clothes (or maybe not), but the attitudes to tax should follow the hairstyles and go straight in the bin.
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