You might have gathered from my notes that I am an incredibly huge fan of the work of Thomas Sowell. There aren’t many economists who manage to explain the dismal science in such common sense ways as he has done in his over 40 books on economics, history and philosophy. I have tried to emulate this, and I have failed. But I like the endless inspiration my failure affords me.
About 10 years ago, he published a very short piece titled “Trickle Down Theory” and “Tax Cuts for the Rich”. He likely wrote it out of irritation. What likely irritated him? A never-dying accusation levelled by critics of tax policies targeting reducing the level of fiscal burden (better summarised as tax cuts). In this essay, he quite clearly helps the reader learn that the origin of these expressions has never been empirically attributed (or attributable) to the proponents of the tax reform policies. In fact, whenever these proposals have been made - and his essay goes all the way back to America’s Secretary of the Treasury over 100 years ago, Andrew Mellon - the documented reasons for them focus on increasing tax revenue or changing the behaviour of the taxpayer.
Yet, the most popular criticism of such measures is either that the proponents are arguing for wealth to “trickle down”, or that the measures are “tax cuts for the rich”. Quite often, both are combined with some fervour. This criticism has had very good political and media returns, despite the evidence that the attribution of these phenomena are, how do you say, bogeyman-ish. I invite you, if you do not already know, to read the essay and pursue as much literature about it as you can find. I will thus not go into the detail of the merits or demerits of tax policy designed to lower the fiscal burden on individuals and businesses. If you look hard enough, there is plenty out there to read.
Luckily for Sowell, he is now 92 years old, and does not have time for social media. So he is unlikely to see the new levels that this genre of criticism has unlocked. Even comedians are in on it. “Trickle down” and “tax cuts for the rich” are back on the meme menu, due in large part to the recent announcements by the UK’s Chancellor of the Exchequer, Kwasi Kwarteng.
I am, admittedly, as irritated about it as Thomas Sowell likely was when he penned his essay. I am irritated because I believe - clearly quite naively - that cleverer economists than me ought to know better. I am irritated because the message I get from the reactions I have seen to the policy measures announced by the Chancellor, is as follows:
Lowering your tax burden is bad for you. You have 100 currency units. Of those 100 units, let’s say you typically give 20 in tax. You get told that you will now give 15 in tax, allowing you extra 5 units you did not have at your disposal before. As you are a flesh and blood human and not a robot, this act will ellicit a behavioural response from you. There are only three things you can do with these extra 5 units: spend it foolishly or wisely, save it in a bank or under your pillow, or invest it in something that succeeds or fails. Or you’ll do some combination of the three. Without going into further detail, there is a multiplier effect of these options that will likely do better for you than would a third party agent, this third party agent being the government. The message I get, from those who don’t know and sadly from those who should know better, is that these options and the behavioural responses to them mean nothing.
The economy is a zero sum game. I can understand this sort of conclusion being drawn by non economists but I find it really hard to forgive when economists fall into the trap of the zero sum fallacy. At the heart of fiscal interventions seeking to lower the tax burden is to increase productivity. You only need to look at the decline in the UK’s workforce participation rate since the 1990s to know that there is a need to reverse incentives to produce stuff. To be fair, such decline over the years is not unique to the UK. The reactions I have seen so far seem to have long concluded that the people and small and medium businesses of the UK, who account for over 61% of total employment, are no longer capable of any kind of meaningful growth. More importantly, they are not deserving of any incentive to grow other than some form of subsidy or cash handout, as opposed to tax relief to free up capital for them to do what they are better at doing themselves than any third party agent.
The real sector doesn’t matter to many of us, particularly those of us in the managerial class. We are sometimes called the laptop class. Or the administrative class. Some of us deny it, but we are quite removed from the daily battles relating to such things as making payroll at the end of the month, fixing an operational problem that has reduced output at the factory, complying with a regulation that means the product will have to be a bit more expensive than the next foreign import that is eating up market share, finding that extra bit of innovation that makes the service more competitive, paying increasing utility bills, looking for cheaper sources of feedstock, and so on. And because we are removed from these daily battles, we are by inference removed from appreciating the kind of relief that will come from shifting the incidence of my tax burden through a simple accounting gesture of allowing me to depreciate my capital expenditure on certain equipment immediately and not over a 5, 4 or 3 year period. We are removed from appreciating what extra job I can create from tax incentives that free up cash flow for me. We are removed from appreciating that all this comes back to the food we order, to the car we service, to the beer we drink, to the sandwich we buy, to the hardware we purchase, to the hotels we reside in, to the jobs - 60% + of them - we have, and so on.
We really don’t know who carries the tax burden in our societies, or we know and we don’t care. It is often said that the rich should pay their fair share. A question that perhaps should follow this is “what would be considered fair?” In the UK, the top 1% of earners accounts for 29% of total income tax receipts. Fan this out to the top 10% of earners, and this lot accounts for over 60% of total tax receipts. What would be considered fair for this group? 70%? 80?% 90%? All of it? There is evidence in the Sowell essay I referred to earlier that tax contributions from this group of earners typically increases when their taxes are lower than when their taxes are higher. Ordinarily, this would be a common sense conclusion to draw for any observer of human behaviour, let alone economists who know where to look for the data. You are incentivised to give more freely if it hurts you less to do so.
We are fact shy. I invite interested readers to read about the December 2017 fiscal policy interventions in the United States, and look particularly at the stated objectives of those interventions, the details of the interventions, and then the outcome of those interventions until covid hit.
As we look more into unconscious bias in race relations, perhaps we might also need to look out for unconscious envy in economic and social relations. It emerged earlier that one of the politicians let some interesting comments slip, concerning her thoughts about the Chancellor. There is reference to the Chancellor as being superficially black, and having perhaps attended Eton or an expensive prep school. I am long enough in the tooth to always seek nuance in the incomplete information publicly available on this matter, but I also understand the need for the quick action that I have learnt has been taken by this politician’s party (there is no need to name names; that is not the point one is trying to make here). At the heart of this type of comment, I argue, is an air of envy that underlies some of the rhetorical responses I have seen to this fiscal measure. Particularly the references I hear about who benefits more and who pays more. 1% of a 10,000 income is 100. 1% of a 1 million income is 10,000. I know, why the need for this reminder, right? What I hear from these reactions is that it isn’t fair that the 10k beneficiary should benefit that absolute amount, when the other guy is only benefiting 100. There is an argument to be made for a progressive system that takes more than 10k from the 1 million fellow, no doubt. But you then have to answer the moral question posed in point 4 above regarding where you stop. You also have to deal with the possibility of a new calculation: 100% of nothing, isn’t very much. At some point, it becomes difficult to argue that resentment does not factor into this conversation.
Normally I wouldn’t comment on things like this, unless of course they have implications on the development game. And this, in my opinion, does. Developing countries are watching, and grappling with very hard fiscal policy choices to balance what would work to attract much needed capital that would translate to jobs and growth, with the pressures of immediate tax income to build roads, hospitals and electricity grids. We are, in effect, telling them that growth does not matter. This is reckless. The Chancellor might buckle and reverse course. In my opinion, that would be unfortunate.