COVID-19 and Tax Cuts – Trickle Up rather than Trickle Down

Posted on February 1, 2021

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Since Mr Reagan in the USA and Ms Thatcher in the UK came to power, we have been told to believe in the “Trickle Down” effect.  Cut taxes of rich individuals and corporations and eventually their gains would trickle down to benefit everybody in society.

A study from the London School of Economics and Political Science has shown that such tax cuts over the last 50 years in 18 OECD (Organisation of Economic Cooperation and Development) countries has helped the rich to get richer and increased inequality in these societies. However it failed to have significant effects on average economic wealth (GDP per person) and unemployment.

In the UK the share of income going to the richest 0.01% of adults has almost reached a record high based on a new analysis of UK tax data. This increasing inequality in society damages our health and well-being, undermines social cohesion and levels of trust, and reduces economic performance. The best you can do to become rich is to be born into a rich family! The emergence of this super-rich elite leads to an undemocratic and unfair society. While the rich get richer in the UK, poor households with children have to rely on low quality food parcels.

The following graphic description of the change of taxes for the rich over the past 50 years and its analysis makes an interesting reading. The red lines indicate major tax cuts for the rich.

Therefore demands for tax increases of top income earners and corporations and a wealth tax are getting louder. The existing economic inequalities have been made worse by the COVID-19 pandemic and its control measures.

The political conclusions of these findings are obvious: The rich and wealthy should pay for the bill of the COVID-19 crisis. The failure of the trickle-down experiment over the past 50 years can teach us an important political lesson about the importance of social equality. The improvement of social protection and services requires political design rather than economic default.