World Politics News   Articles for World Politics Course

David Hope and Julian Limberg of the London School of Economics have published a paper entitled “The Economic Consequences of Major Tax Cuts for the Rich“. The study examines the ideology of “Trickle-down” economics which is used to justify reducing the tax burden on capital-rich individuals because such actions stimulate economic growth which ultimately benefit even the poorer members of society. The study examined data from 18 OECD democracies over 5 decades (1965-2015).

“Our results show that, for both matching methods, major tax cuts for the rich increase the top
1% share of pre-tax national income in the years following the reform (� + 1 to � + 5). The
magnitude of the effect is sizeable; on average, each major reform leads to a rise in top 1%
share of pre-tax national income of 0.8 percentage points. The results also show that
economic performance, as measured by real GDP per capita and the unemployment rate, is
not significantly affected by major tax cuts for the rich. The estimated effects for these
variables are statistically indistinguishable from zero, and this finding holds in both the short
and medium run.

“Our findings align closely with the existing correlational evidence showing that tax cuts for
the rich are associated with rising top income shares (Atkinson and Leigh, 2013; Huber et al.,
2019; Piketty et al., 2014; Roine et al., 2009; Volscho and Kelly, 2012). We make an important
contribution to this literature, however, as our empirical strategy allows for the estimation of
causal effects. This is particularly pertinent in this case, as there is a large political science
literature on the power of rich voters and organised business interests to shape public policies (incl. tax policies) in their favour (Bartels, 2009; Emmenegger and Marx, 2019; Gilens, 2005;
Hacker and Pierson, 2010; Svallfors, 2016), which suggests reverse causality could be a
major issue in empirical studies lacking a clear identification strategy.

The study fits comfortably with other recent studies on income and wealth inequality in rich countries by scholars such as Thomas Piketty. For much of the 20th Century, the subjects of income and wealth inequality were largely ignored by most economists who concentrated more on the issue of bolstering economic growth. The assumption that a “rising tide lifts all boats” was a mantra of market capitalism. That assumption looks increasingly simplistic and wrong.