If you’re ever at a posh cocktail party – of the kind they throw on the top floors of city law firms – a safe subject of conversation would be taxing the rich, and why it’s a bad idea.
Cutting taxes on the rich, goes the argument, is good for everyone: it stimulates growth; it keeps investment onshore – instead of offshore in those pesky tax havens the law firms have to facilitate. And if it boosts income inequality then, in the longer term, wealth trickles down to all the florists, chauffeurs and masseurs employed by luxury consumption, and the economy grows.
Buoyed by this certainty, governments across 18 OECD countries slashed the effective tax rate on the richest one per cent of earners from 60 per cent to 40 per cent during the 1980s. And this was no gradual process: from Ronald Reagan to Margaret Thatcher to Labour’s Roger Douglas in New Zealand, neoliberal governments inflicted immense, one-off shocks to the system, completely restructuring the relationship of rich people to the state.
A new study by the King’s College London economists David Hope and Julian Limberg provides the most definitive picture yet of the fallout.
“Tax cuts for the rich,” they write, “lead to higher income inequality in both the short- and medium-term. In contrast, such reforms do not have any significant effect on economic growth or unemployment.” They also say that there is no evidence that “trickle down” from rich to poor improves economic performance.
That free-market economics boosts inequality and promotes stagnation is not a new argument. What’s new in this study is the attempt to quantify the result of major one-off tax reforms of the kind Reagan introduced in 1986 and Thatcher in 1988. These are modelled for ripple effects over time. The results are conclusive.
Each major tax reform studied leads to the richest 1 per cent in society scooping an extra 0.7 per cent of GDP through higher incomes, capital gains and asset price rises. It has no discernible positive effect on anybody else.
Of course, tax cuts for the rich were not the only driver of inequality over the past 40 years. Criminalising effective trade unionism, shipping millions of well-paid jobs offshore to Asia and Latin America, and the rise of tech monopolies with considerable pricing power over consumers and suppliers all contributed to making our economies shockingly inequitable.
But the results are clear. Across the OECD the incomes of the top 10 per cent are now ten times higher than those of the poorest (up from seven times just 40 years ago). Between 1990 and 2009 the share of GDP paid as wages fell by almost five percentage points (from 66.1 to 61.7). The figure sounds small until you realise that – according to mainstream economic thinking – it was supposed to remain eternally in stasis.
The story of the neoliberal era, then, at least for the developed world, is that the wage share of GDP fell, the profit share rose, inequality widened – and that far from boosting economic growth, this social upheaval had no discernible effect on it.
Whatever did drive economic growth during the so-called Goldilocks Era – a mixture of low interest rates, cheap credit, the expansion of the workforce of the Global South and technological change – no longer does so. The entire world economy, from the US to China, is dependent on central bank money creation and “extend and pretend” policies for effectively bankrupt firms.
Surveying the charts in Hope and Limberg’s paper, I was struck by the clarity of the change my generation has lived through. A slump in effective tax rates on the rich, a slump in the wage share, a hike in inequality. If this had produced a happy and contented society, with countries at peace with one another, heading for stable, liberal democracies, you might conclude it was all worth it.
But it has, instead, plunged Western societies into a cultural civil war, tanked economic growth, left a mountain of debt that can never be repaid and disordered geopolitics so badly that we’ll be lucky to avoid a conventional war this decade.
It’s been, in short, a revolutionary period for the rich. They seized control, enriched themselves, eroded the legitimacy of democratic institutions, flouted the law, welcomed crooks and oligarchs into their private clubs, and are now flabbergasted at the scale of the instability they’ve unleashed.
If social democracy is to stand for anything in the mid-21st century it should be a revolution to undo all of this. The scale of the ambition should be to reverse the effects shown in Hope and Limberg’s study. And though taxing the rich is only a part of the solution, we cannot avoid it, or apologise for it.
The Labour Party under Keir Starmer has backtracked from the 2019 manifesto pledge to raise an extra £5.4bn from income tax on high earners. John McDonnell’s pledge to raise another £24bn by reversing cuts to corporation tax has already been stolen by Rishi Sunak, due to the force majeure of Covid-19. Rachel Reeves has hinted that Labour will raise taxes from shareholders, bondholders and buy-to-let landlords – which Labour in 2019 thought could raise at least £14bn. But the rest of McDonnell’s tax-the-rich plan has bitten the dust.
In its place Labour is rightly focused on the cost-of-living crisis. It is proposing tax cuts on energy bills and a one-off windfall tax on oil and gas producers to protect households from the forthcoming price cap hike and 5.1 per cent inflation. But if we want to reverse the social changes Thatcher and her chancellors engineered, the Hope and Limberg paper points to the answer. Labour needs a big, one-off tax reform. It needs to convince its potential coalition partners (primarily the SNP) that this is needed. And it needs to convince an electorate gulled by trickle-down ideology that it will work.
This won’t be easy – in part because of that other famously safe topic of conversation at elite social events: the Laffer Curve. Arthur Laffer’s doctrine – that taxing the rich makes them stop working, or behave differently, so that at a certain point you raise less tax than you intended – is as fundamental to neoliberalism as trans-substantiation is to Christianity.
So deeply is it ingrained in the thinking of the economic establishment that in 2019 Labour itself had to scale back the radicalism of its spending programme and model “behavioural change” among the rich to cost its manifesto. Neoliberal ideology has become so accepted among the electorate that, even now, with a centrist shadow chancellor and a shadow front bench purged of all radicals, voters greet any spending proposals with the question: “How are you going to pay for it?”
The task is to do something no Labour leadership has achieved since the early years of Blairism: a consensus that taxing the rich is good for the economy; that it will generate money; that it will hit the rich only; that the intent is to unleash the skills and ingenuity of the average worker and their family, not to scoop up more of their wages through a general tax increase.
For Reagan and Thatcher, the decisive tax reforms came eight years into their time in power. Revolutions take time to prepare; the alliances needed to deliver them have to find their feet in minor skirmishes, and on more easily winnable battlefields. Reversing the neoliberal revolution in taxation will take a similar amount of preparation – political and ideological. But it can be done.
To raise the effective tax rate on Britain’s top 1 per cent far above its current 42 per cent promotes all the objectives Starmer originally set out in his bid for leadership: social justice, climate justice, economic justice. It would have to be accompanied by stringent measures to shut off access to offshore tax havens, and the closure of loopholes worth billions of pounds.
Above all, as with the 2019 manifesto, it would have to involve coercive measures against speculators and rent-seekers. But timing is all. Later and bigger would fit the pattern established by Reagan and Thatcher – and have a better chance of triggering a decisive change in social outcomes.