Historical Tax Cuts for the Wealthy and Income Inequality

I'll take, "No sh!t, Sherlock," for $200 please, Alex.

Edit - Thank you everyone for the awards, really cool!!

• Large tax cuts for the rich cause higher income inequality, and don't fuel economic growth or cut unemployment, a new paper by academics from the London School of Economics and King's College London shows.

• Their analysis of 50 years of tax cuts for the wealthy in 18 countries counters arguments that such cuts have "trickle-down" effects for the rest of the economy.

• "Cutting taxes on the rich increases top income shares, but has little effect on economic performance," the researchers concluded.

Context

Throughout most of the modern history of the western world, grotesque inequality was the dominant characteristic of society. From oppressive empires to feudalism - the structure of society was a small, incredibly wealthy elite at the top and the masses at the bottom living in abject poverty.

In World War II, a huge amount of wealth was destroyed and governments taxed at astronomically high rates. After the war, this led to a political consensus which accepted high taxes and a significant role for the state in service provision. As this was a time of rebuilding, this effectively captured wealth creation from a low base and mitigated hoarding by the rich, leading to higher living standards for the average person.

In the 1980s, this consensus was broken and, amongst other things, we significantly reduced the level of tax and wealth redistribution. Since then, we have seen wealth inequality skyrocket, assets are increasingly owned only by the wealthy and ordinary people are unable to meet their basic needs. I am from the UK so I naturally think and know more about the position here, but I think this is broadly applicable to much of western society.

My view

• An economy which allows extremely rich people to exist and does nothing to put limits on their wealth will collapse into a form of feudalism. Where, because the rich own virtually all the assets, the majority have to choose between serving the asset owners in absolute poverty, or death.
• Western society has coalesced around the view that we should not or cannot redistribute wealth to increase living standards.
• Therefore, wealth inequality will cause our society to collapse into a modern form of feudalism. Potentially worse than the pre-industrial period as AI and automation could remove labor as the only valuable asset the poor hold.
• Regardless of your position on the traditional left-right divide, you should accept that this is the defining issue of our time. While this view is commonly associated with the political left, wealth inequality is also a threat to a well functioning capitalist society.
• The least worst solution is to tax the wealth of the richest individuals (in the ballpark of a net worth of $10m, but agnostic on the precise figure)

Arguments I have considered

I have thought through the below arguments and, while I do not wish to dismiss them out of hand, I do not find them convincing. I would be happy to hear more about these, how I might be wrong about them or about a different perspective I have not considered, but I wish to take the conversation further than these common talking points.

Taxing wealth is too hard - Wealth is not just money sitting in a bank account ready to be taxed. It is intangible, subjective and subject to the whims of the market. It would be so hard to tax such wealth to the point where it is prohibitive.

I accept that it is hard to tax wealth, and much harder than taxing income or consumption. However, I think this argument is often deployed by people who are ultimately opposed to the principle of taxing wealth. I don’t accept that it being hard is a reason not to do it - we are a clever species and have achieved incredible things under political consensus. My bar is very high for how hard a task this must be to not pursue it.

If you tax rich people, they will leave - The rich are more economically mobile than they ever have been. They will move their wealth to tax havens and this will damage the economy.

Wealth is derived from the value we collectively ascribe to things, and this is driven by demand. Land is only so valuable in the western world because lots of people want to live there. Amazon is only so valuable because we perceive it as successful and demand its shares. 

Fundamentally the wealth of western nations is derived from the people of the nations themselves. If rich people want to be able to access the customer base of wealthy nations, we can and should make them pay for that privilege. At this point this argument begins to boil down to the ‘too hard’ argument.

A rising tide lifts all boats - It’s not a problem for the gap between rich and poor to rise, so long as the poor are also getting richer.

I accept that in a hypothetical economy which is rapidly growing (~10% annually), the need to redistribute is less pressing, but I do not accept that this eliminates the principle. In the long run, I think such an economy still tends toward feudalism which effectively cannibalizes growth (as we may be seeing in China).

But even extending this hypothetical economy’s growth indefinitely, we would still see a rich class eating up the assets of the economy and inflating their price so that the average person cannot keep up, locking them out from owning assets, placing them back in the position of the serf.

Wealth inequality is not an issue/not of primary concern - It is morally not a problem for some people to be exponentially more wealthy than others. They worked hard for that wealth they should have it. Or, maybe there is a problem but other things are more important (immigration, woke, or any other issue)

Setting aside the view it is not an issue because it doesn’t exist (I think data very clearly bears that it does), I think this argument rests on things not getting worse. My claim is not just that wealth inequality is bad, it's that it will lead us to collapse of society as we know it. I find the moral case for this pretty hard to buy.

I accept there are other issues of importance but I think wealth inequality is the defining issue of our time because people can feel that their material conditions are worsening, and this is of primary concern to most people. As the rich buy more of the housing, salaries stagnate and government services crumble, this issue drives almost every other. I would be interested to hear an argument which effectively states that issue X is of more concern to the average person than the material conditions in which they find themselves.

People keep mentioning how this has been known for a while, what is missing is how long of a while.

It is longer that most realize. In the 1890s it was dubbed Horse & Sparrow economics.

Tax cuts for the wealthy have long drawn support from conservative lawmakers and economists who argue that such measures will "trickle down" and eventually boost jobs and incomes for everyone else. But a new study from the London School of Economics says 50 years of such tax cuts have only helped one group — the rich.

The new paper, by David Hope of the London School of Economics and Julian Limberg of King's College London, examines 18 developed countries — from Australia to the United States — over a 50-year period from 1965 to 2015. The study compared countries that passed tax cuts in a specific year, such as the U.S. in 1982 when President Ronald Reagan slashed taxes on the wealthy, with those that didn't, and then examined their economic outcomes. 

Per capita gross domestic product and unemployment rates were nearly identical after five years in countries that slashed taxes on the rich and in those that didn't, the study found. 

But the analysis discovered one major change: The incomes of the rich grew much faster in countries where tax rates were lowered. Instead of trickling down to the middle class, tax cuts for the rich may not accomplish much more than help the rich keep more of their riches and exacerbate income inequality, the research indicates.

"Based on our research, we would argue that the economic rationale for keeping taxes on the rich low is weak," Julian Limberg, a co-author of the study and a lecturer in public policy at King's College London, said in an email to CBS MoneyWatch. "In fact, if we look back into history, the period with the highest taxes on the rich — the postwar period — was also a period with high economic growth and low unemployment."

You’d think that more people with disposable income means more money spent in the economy growing it.

1 wealthy person is not spending money like 1000 middle class Americans. They’re putting it in a small slice of the economy that’s sole purpose is to grow it or acting like banks with angle investing etc.

I literally don’t even want less taxes.. tax me more if you have to, but give me healthcare and infrastructure and education.. stop fucking building weapons. Reverse the tax cuts and take care of the fucking people in this country. Why are we paying federal taxes? For never ending war and corporate protections? Fuck off

I studied economics in college 20 years ago and we knew it didn't work like that back then. No one voluntarily increases supply when there's no additional demand.

Trickle UP is what works. You give money to people that will spend it. That creates demand which incentives producers to increase supply, which creates jobs, which increases overall spending, which creates demand, and the circle goes 'round.

That's why the free money we got during the pandemic was called "stimulus" money.

In the 1980s, this consensus was broken and, amongst other things, we significantly reduced the level of tax and wealth redistribution. Since then, we have seen wealth inequality skyrocket, assets are increasingly owned only by the wealthy and ordinary people are unable to meet their basic needs.

In the United States, the top 1% pay 40% of the total income taxes. The top 10% around 72% of the total income taxes. Not only do we tax the rich, but we do so in a manner that is incredibly imbalanced.

I don't know what the breakdown for the UK is, but at least in the US, we heavily tax the rich.

An economy which allows extremely rich people to exist and does nothing to put limits on their wealth will collapse into a form of feudalism. Where, because the rich own virtually all the assets, the majority have to choose between serving the asset owners in absolute poverty, or death.

There is no evidence to support this viewpoint. The ability to amass wealth has not shown itself to devolve into feudalism; if anything, the liberalization of markets since the collapse of the Soviet Union has accomplished the exact opposite.

Western society has coalesced around the view that we should not or cannot redistribute wealth to increase living standards.

This is unfortunately untrue as well. For all the narratives against wealth distribution, Western society spends more on social welfare programs than ever before, funded almost entirely on the backs of the top earners and distributed to the lowest on the economic ladder.

Regardless of your position on the traditional left-right divide, you should accept that this is the defining issue of our time

Putting aside the fact that he's pissing away his legacy with DOGE, the fact that Elon Musk has ~$300 billion dollars has zero impact on my day-to-day life. In as much as he has the fiscal wherewithal to invest heavily in green technology, in modern rocketry, and so on is a net benefit.

I don't know how society benefits from trying to claw back any of that particular wealth, especially if it means fewer technological improvements, fewer electric vehicles, and so on.

The least worst solution is to tax the wealth of the richest individuals (in the ballpark of a net worth of $10m, but agnostic on the precise figure)

Let's say we do this. Let's break it down in simple terms, and be as generous to your position as possible here. We will assume that the imposition of the wealth tax will not impact the value of any assets, and that the wealth will not migrate out of the country to avoid the tax.

A person with assets of $100 million eats a 1% wealth tax - $1 million to the government. So right away, That asset is now worth $99 million at the end of the tax year.

Year two: the asset is now worth less. 1% of $99 million - $990,000. This assumes as well that the asset is not beginning to depreciate in value based on this situation. The asset is less valuable, and probably isn't even worth $99 million anymore because people are avoiding investing in these larger vehicles.

Year 3: We're now at $98.1m, with $981,000 in taxes. Three years in a row now, declining revenues and declining asset values. What happens to that asset? What happens to the business that loses value every year? What happens to the people who work for those companies, to the people who rely on those products. Everyone is poorer as a result. Why would anyone sign onto this?

A wealth tax feels good because it creates a useful scapegoat. If we can blame the rich for the problems and pretend taxing their wealth will fix it, you can avoid a lot of difficult conversations about national priorities and individual interests.

(This also assumes the asset value can be made liquid in some form. If I own a house that's worth $500,000, my ability to tap into that wealth is limited.)

Let's go back to Elon Musk. Again, not forgiving his recent behavior: Tesla has arguably done more for clean energy than any other action in the last 20 years. SpaceX has advanced spacefaring technology exponentially in the last decade. A wealth tax, to me, is someone saying "yes, we all benefit from a cleaner environment and a better society, but we'd benefit more if we didn't have those things and just had some of Elon's money in the Treasury instead." What motivation is there for SpaceX if the stated goal of a wealth tax is to make it difficult for growth and scaling? What about the people who end up with a lot of wealth and little liquidity? How does society benefit from that?

Setting aside the view it is not an issue because it doesn’t exist (I think data very clearly bears that it does)

I would challenge you on this particular point. I would say that the issue doesn't actually exist for you, or at least not in the way that you think. If you notice someone's "extreme" wealth at all, it's in the context of your life being better because of it, not worse. Your position here works under the incorrect framework that there is a finite amount of wealth and that the assets which make up this wealth are not reinvested or otherwise spent. Some like to say it's rich people "hoarding" the wealth, as if it's Scrooge McDuck swimming in a vault of pennies or a dragon's cave full of gold. In reality, the "wealth" is mostly paper, and mostly in the form of the very investments that make your life better in ways you barely even notice.

So yeah. Wealth inequality? It doesn't matter. It's not a defining issue, it's not an important issue, and you should really be focused on other things if you want an improvement in society, because wealth disparity isn't the problem.

Conservative Lawmakers and Economists always knew this. They KNOW it's BS. But it benefits they and their Masters.

What strikes as me the most unjust isn't even inequality itself, but poverty.

You could theoretically have a society in which there are extremely rich people, but where most of the population has their basic needs comfortably met (food, housing, energy, water, medical needs, and education).

If we lived in such a society, I wouldn't find myself caring about inequality all that much.

I think there’s the inherent assumption in your post that the poor are poor because the rich are rich, whereas I don’t see it as a zero-sum game.

Another objection is that taxing wealth vs. income requires the taxee to raise cash, which would require the liquidation of assets. This would raise the cost of capital making labor less efficient.

The last objection I have is that this would be inflationary as money would be put into consumption from production and drive up living costs for the people receiving the benefits, while disincentivizing work. More money chasing fewer goods means higher prices.

I look at wealth as the goose, and income as the golden eggs. This would be akin to killing some geese to try to get more eggs.

When I was a kid, I was told how Democrats believe in "Borrowing our way out of debt" to take out a loan to pay for the deficit and somehow, we'd get out of debt.

What I learned was that Republicans were the ones that wanted to cut our income, borrow money to pay for that lost income then blame and charge poor people for being poor and somehow, that would pay itself off.

Republicans were the party of borrowing their way out of debt and claimed it was all Democrats all along.

Reaganomics messed things up