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Trickle-Down Tax Cuts Make the Rich Richer, the Poor Poorer

As Congress tucks Trump’s last great misdirected policy priority, a 100% write-off for corporate schmooze-lunches (save those McDonald’s receipts, Donald!), into its coronavirus relief/budget deal, we do well to remind ourselves that those martini tax breaks don’t trickle down to the waiting working class:

Tax cuts for rich people breed inequality without providing much of a boon to anyone else, according to a study of the advanced world that could add to the case for the wealthy to bear more of the cost of the coronavirus pandemic.

The paper, by David Hope of the London School of Economics and Julian Limberg of King’s College London, found that such measures over the last 50 years only really benefited the individuals who were directly affected, and did little to promote jobs or growth.

“Policy makers shouldn’t worry that raising taxes on the rich to fund the financial costs of the pandemic will harm their economies,” Hope said in an interview [Craig Stirling, “Fifty Years of Tax Cuts for Rich Didn’t Trickle Down, Study Says,” Bloomberg, 2020.12.15].

Hope and Limberg looked at tax cuts enacted in 18 Organization for Economic Cooperation and Development nations over 50 years, including the United States’ Reagan tax cuts of the 1980s. Their results add causal force to the correlation between tax cuts for the rich and rising top incomes identified in numerous past studies:

Overall, our analysis finds strong evidence that cutting taxes on the rich increases income inequality but has no effect on growth or unemployment. We do not directly test mechanisms in our analysis, but using a measure of top 1% share of pre-tax national income that includes both labour and capital income makes it less likely that tax shifting and avoidance are driving the results. Our results are in line with those in Piketty et al. (2014), which suggest that lower taxes on the rich encourage high earners to bargain more forcefully to increase their own compensation, at the direct expense of those lower down the income distribution [David Hope and Julian Limberg, “The Economic Consequences of Major Tax Cuts for the Rich,” Working Paper 55, London School of Economics and Political Science: International Inequalities Institute, December 2020].

Robert Reich says the Biden Administration should capitalize on these findings by replacing trickle-down economics with build-up investments:

Build-up economics reached its zenith in the decades after the second world war, when the richest Americans paid a marginal income tax rate of between 70% and 90%. That revenue helped fund massive investment in infrastructure, education, health and basic research – creating the largest and most productive middle class the world had ever seen.

But starting in the 1980s, America retreated from public investment. The result is crumbling infrastructure, inadequate schools, wildly dysfunctional healthcare and public health systems and a shrinking core of basic research. Productivity has plummeted.

Yet we know public investment pays off. Studies show an average return on infrastructure investment of $1.92 for every public dollar invested, and a return on early childhood educationof between 10% and 16% – with 80% of the benefits going to the general public [Robert Reich, “Trickle-Down Economics Doesn’t Work But Build-Up Does—Is Biden Listening?” blog, 2020.12.20].

Reich sees the coronavirus pandemic as hard proof that investing in public goods and services does far more good for all Americans than cutting taxes for the 1%:

The COVID vaccine reveals the importance of investments in public health, and the pandemic shows how everyone’s health affects everyone else’s. Yet 37 million Americans still have no health insurance. A study in the Lancet estimates Medicare for All would prevent 68,000 unnecessary deaths each year, while saving money.

If we don’t launch something as bold as a Green New Deal, we’ll spend trillions coping with ever more damaging hurricanes, wildfires, floods and rising sea levels.

The returns from these and other public investments are huge. The costs of not making them are astronomical [Reich, 2020.12.20].

We shouldn’t subsidize any millionaire’s third martini until we’ve paid for everyone’s second coronavirus shot. Tax all wealth, especially the great mountain of wealth accumulated by the elites, to make society stronger and healthier for everyone.

5 Comments

  1. Richard Schriever 2020-12-21 09:17

    A better deduction restoration would have been the per diem for meals (unreimbursed employee expenses) for away from home workers like me as a tax INCREASE. Hundreds of thousands of people were impacted by that change. The corporate schmooze lunch is just more elitist hubris.

  2. Jake 2020-12-21 15:38

    Yeah, Cory-ALL wealth should be taxed in order to give ALL society the benefits of living in that society. As you said, most are still eating, so why more farm subsidy? It takes so many calories/day to subsist and many are subsisting on far fewer than the rich. Biggest con put on by the GOP
    in their tax “cuts” is that the job ‘providers’ should get taxed less because of created jobs. Most jobs are created by someone borrowing money and starting a new business. When someone like Bezos’ ex-wife can give over 4 billion dollars to charity and still live so well. it shows it was gotten originally from the efforts and labor of the lower classes passed up to the ‘elites’. Once elitism is experienced it’s hard to change. This woman gave the Feeding SD over a million. Too bad, our governor didn’t put some of the Covid $$$ from socialist Trump to such cause. But, she’d rather throw it in the chamber hog-trough and watch her minions scramble after it like the fine little piggies they seem to be when there’s free gov’t money involved!

  3. Jason 2020-12-22 11:18

    This trickle down scheme has been our standard economic policy for two generations. The result is wealth and income inequality at record levels. The academic critiques clearly demonstrate that tax cuts for the rich only exacerbate inequality and fail to provide meaningful material improvement for ordinary citizens.
    During the past 40 years we have had two Democratic presidents that have served a combined 16 years. Both of these administrations failed to pull the US back to a semblance of social democracy. Both Democratic presidents abondoned Labor and opted for capitalist solutions caused by capitalism. Yes, they slightly raised taxes on the rich and pushed for better business practices. But, they failed to pull back from this overall trend toward trickle down economics.
    Biden needs to deliver a New Deal 2.0. He needs to move our political economy back to a balance between capitalism and socialism. An economy that works for the average worker will decrease the appeal of the next fascist-like demagogue. A multiracial working class movement could act to weaken our deep-rooted white supremacist tendacies.

  4. mike from iowa 2020-12-22 12:14

    Don’t forget the 2017 taxcuts for the koch bros that wingnuts used legislative sleight of hand to pass with 51 votes and no input (or votes) from Dems that, starting in 2021, raise taxes on lower income workers. This came about because in order to pass the bill with 51 votes, it could not raise the deficit over a certain amount. That amount came about as wingnuts wanted to make the high income taxcuts permanent and to do so they had to raise future taxes on the lowly working classes.

    They could have chosen to make lower workers meager taxcuts permanent, but, we are dealing with selfish right iwng nutters infatuated with giving all wealth to the 1%.

  5. leslie 2020-12-22 14:46

    Thank you mfi, home run as usual. Comment Bill from Ill?

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