The researchers started by constructing a composite measure of â€œtax cuts on the richâ€ encompassing a variety of taxes, including the top tax rate on personal income, the estate tax and the tax on capital gains. Because these taxes are levied predominantly on the wealthiest members of society, the wealthy stand to gain the most when theyâ€™re cut.
While previous studies on the effects of taxing the rich have tended to focus on just one type of tax, â€œour measure combines all of these important taxes on the rich into one indicator,â€ Hope and Limberg wrote in an email. â€œThis provides a more complete picture of taxes on the rich, but it also allows for comparisons across countries and over time.â€
Using this measure, they set out to identify â€œmajorâ€ tax cuts on the rich in 18 wealthy nations from 1965 to 2015. In the United States, that included the Reagan tax cuts of 1981 and 1986, which dramatically reduced the top income tax rate from 70 percent down to 28 percent after fully taking effect.
They then traced what happened to those nationsâ€™ economies in the five years after the cuts were implemented. They focused particularly on income inequality, economic growth as measured by gross domestic product, and the unemployment rate. They aggregated those trends across countries to capture the broadest possible picture of the tax cutsâ€™ effects.
Their results appear in visual form below.
First, the tax cuts succeeded at putting more money in the pockets of the rich: the share of national income flowing to the top 1 percent increased by about 0.8 percentage points (for comparison, in the U.S. the bottom 10 percent of earners capture only 1.8 percent of the countryâ€™s income).
But they had no effect on either economic growth or employment; though those quantities fluctuated slightly following the major tax cuts studied, the effect was statistically indistinguishable from zero. The â€œrocket fuelâ€ so often promised by supporters of these tax cuts? It fizzles out time and time again.
â€œIn the last decade, especially with the pioneering work of Thomas Piketty and his co-authors, there has been a growing consensus that tax cuts for the rich lead to higher income inequality,â€ Hope and Limberg wrote via email. Piketty, a French economist, wrote â€œCapital in the Twenty-First Century,â€ an influential book on the growth of inequality in rich nations.
â€œThere is a large political science literature on the power of rich voters and organised business interests to shape public policies in their favour,â€ the authors write.
Hope and Limberg say their findings offer one clear pathway for policymakers looking to dig their way out of the financial hole created by the coronavirus crisis: Make the rich pay for it.
Though the pandemic cost tens of millions of Americans their jobs and sent the U.S. economy into a tailspin, many at the top of the income distribution have seen their wealth skyrocket. The nationâ€™s 651 billionaires saw their net worth spike by more than $1 trillion during the first nine months of the pandemic according to Americans for Tax Fairness, a progressive group advocating for higher taxes on the wealthy.
â€œWe would argue that governments should not be unduly concerned that taxing the rich will harm their economies when deciding how to pay for the costs of COVID-19,â€ they wrote via email.
Given the historically low tax burdens currently enjoyed by Americaâ€™s wealthy, their ability to pay for higher taxes has probably never been better.