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They Said Tax Cuts for the Rich Would Create Jobs. It Never Happened.

For forty years, governments around the world have been cutting taxes on the rich, claiming that the result would be more jobs and higher incomes. A new study shows how catastrophically wrong that policy has been.

The key finding of a new study from the London School of Economics confirms that tax cuts benefited the rich while failing to improve economic performance. (Unsplash)

In March 1988, UK chancellor Nigel Lawson tabled his famous “tax reform budget.” Though the Thatcherite offensive against social democracy had already been underway for years, the document was in some ways the ultimate summation of its political project — legislating a bonanza of tax cuts disproportionately benefiting the wealthiest people in Britain. Slashing corporation and inheritance taxes, the pièce de résistance was undoubtedly a cut in the top income tax rate from 60 percent to 40 percent. As the late G. A. Cohen once observed, the cut “enlarged the net incomes of those whose incomes were already large, in comparison with the British average, and of course, in comparison with the income of Britain’s poor.”

That wasn’t how Lawson justified it, of course. “Prudent financial policies,” he argued during the budget’s tabling, “have given business and industry the confidence to expand, while supply side reforms have progressively removed the barriers to enterprise,” before promising to introduce “a number of measures designed to improve the performance of the economy still further, by changing the structure of taxation.”

Lawson’s rhetoric was by no means isolated to Britain. By the late 1980s, states all over the world were embracing tax cuts as something of an economic panacea: the removal of a needless impediment to prosperity, individual freedom, and the proper functioning of markets. “Economic performance,” as Lawson and so many others implied, would quickly improve as capital was invested more efficiently and companies used their newly untaxed revenue to expand and increase employment in the process.

These arguments have long been disputed, but a recently published study by the International Inequalities Institute at the London School of Economics offers new empirical evidence to strengthen the case. Drawing on data from eighteen OECD countries, authors David Hope and Julian Limberg use a metric of their own design to investigate the macroeconomic implications of tax cuts for the rich over a period of fifty years (1965–2015) — specifically in relation to income inequality, growth, and unemployment. Employing a comprehensive approach that includes various kinds of tax cuts, Hope and Limberg find that their major outcome has, predictably, been to increase the share of wealth owned by the richest 1 percent:

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. 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.

So what about reduced unemployment and increased growth? On both counts, the authors observe that decades of tax cuts for the rich have done little — a finding, in their words, that provides strong “evidence against supply-side theories that suggest lower taxes on the rich will induce labour supply responses from high-income individuals (more hours of work, more effort etc.) that boost economic activity.”

Set against this data, one of the central arguments made for neoliberal economics effectively collapses. Then again, this only holds true if we take those arguments at face value and in good faith. Neoliberalism may be an ideology with a set of claims about markets and the state but, as David Harvey has argued, it is first and foremost a political project. “There’s a wing of people,” as he put it to Jacobin in 2016, “who say that, well, neoliberalism is an ideology and so they write an idealist history of it.” But, argues Harvey, this picture is ultimately incomplete:

I’ve always treated neoliberalism as a political project carried out by the corporate capitalist class as they felt intensely threatened both politically and economically toward the end of the 1960s into the 1970s. They desperately wanted to launch a political project that would curb the power of labor . . . Capital reorganized its power in a desperate attempt to recover its economic wealth and its influence, which had been seriously eroded from the end of the 1960s into the 1970s.”

Hope and Limberg’s study undoubtedly offers a valuable empirical counterpoint to the standard case for tax cuts made since the 1980s. But its key finding — that those cuts have benefited the rich while failing to improve economic performance — is also, ironically, a testament to how successful the neoliberal project has actually been.