With hours to go until the first meeting between the UK’s new Prime Minister and the US president, Joe Biden dropped a bombshell. “I am sick and tired of trickle-down economics,” he posted to his @POTUS Twitter account. “It has never worked.”
Liz Truss, whose Chancellor, Kwasi Kwarteng, will on Friday announce a package of tax cuts, many of which will benefit the wealthy the most, may have struggled not to take that personally. Although a No 10 spokesperson insisted that it was “ludicrous” to suggest Biden’s criticism was aimed at Truss, the Prime Minister herself is a staunch proponent of the theory.
But what is trickle-down economics – and why is Truss such a fan?
What is trickle-down economics?
Trickle-down economics is the theory that if the wealthiest are allowed to flourish everyone will benefit. It holds that if businesses, investors and the well-off are targeted with tax cuts, that will give them extra cash to pay wages, spend in shops and generally put back into the economy.
The term “trickle-down” was originally a gag by the Depression-era comedian Will Rogers, who quipped that President Herbert Hoover’s recovery plan meant “money was all appropriated for the top in the hopes it would trickle down to the needy”. During the 1980s Ronald Reagan and Margaret Thatcher decided it was no longer a joke. In her first Budget in 1979 Thatcher cut income tax for top earners from 83 per cent to 60 per cent, and then, by 1988, to 40 per cent (although she also reduced the basic rate – from 33 per cent to 25 per cent).
This became the prevailing economic philosophy for generations of Conservative politicians – including Boris Johnson, who in 2013 said we should “give thanks for the prodigious sums of money that [the very rich] are contributing to the tax revenues of this country, [which] enable us to look after our sick and our elderly and to build roads, railways and schools”.
Shortly after Biden’s denunciation of the theory, Truss herself told Sky News that “people on higher incomes generally pay more tax, so when you reduce taxes there is often a disproportionate benefit because those people are paying more taxes in the first place”.
Does trickle-down economics work?
The theory has been largely discredited. In 2011 the Organisation for Economic Co-operation and Development (OECD), a highly respected intergovernmental organisation, published a report showing the gap between the top and bottom 10 per cent of global earners was expanding prodigiously. The OECD argued that one of the best ways of narrowing the gap would be to tax the wealthy more. Trickle-down theory “has had the last rites pronounced on it”, wrote the Financial Times.
The British public appears to agree. In 2015 YouGov produced a survey asking whether lowering taxes for the wealthiest groups and individuals leads to economic growth that makes poorer people better off. Fifty-seven per cent of people said they felt it generally does not, while only 17 per cent believed it does.
Will this week’s mini-Budget be based on trickle-down economics?
The policies expected to be announced as part of Friday’s mini-Budget indicate that Truss is another devotee of trickle-down theory.
Analysis by the company Interactive Investor suggests that taken together, the decision to scrap the 1.25 per cent increase in national insurance, a 1p income tax cut, and an increase to the higher-rate income tax threshold to £80,000 could benefit the highest earners considerably more than those on lower incomes. According to the analysis, while those on £20,000 would save £167 a year (0.84 per cent of their income), those on £100,000 would save £7,913 a year (almost eight per cent of their income).
Truss is also said to be considering scrapping the cap on bankers’ bonuses, and is pursuing a solution to the energy bills crisis that helps everyone, rather than targeting the poorest as many economists had hoped. The Prime Minister has insisted that she is willing to make the “difficult decisions”, even if it means she is unpopular. But in unveiling tax cuts that benefits the wealthiest most by an order of magnitude, right in the middle of a cost-of-living crisis, she certainly appears keen to remain popular with one part of society.