Liz Truss exploits ‘trickle down’ to defend £30 billion in tax cuts.
UK PM Is Reviving The Idea That Cutting Taxes For The Better Off Ultimately Benefits Everyone – The IMF And Joe Biden Disagree
In the 1980s, both Ronald Reagan in the United States and Margaret Thatcher in the United Kingdom championed trickle-down economics. It revived in America under both George W. Bush and Donald Trump, and it is currently seeing a resurrection in the United Kingdom under new Prime Minister Liz Truss.
The theory of trickle-down economics is straightforward. Governments should reduce taxes on the wealthy and on corporations since this is the key to ensuring higher development. Entrepreneurs are more willing to establish and develop enterprises, businesses are more likely to invest, and banks are more likely to boost lending if they pay less tax.
Initially, the affluent benefit, but as the economy grows, more well-paying jobs are created for working people and everyone benefits. Governments should forgo focusing on how the economic pie is divided and instead concentrate on expanding the pie.
Supporters of trickle-down economics sometimes point to the work of US economist Arthur Laffer as proof that the idea works. According to Laffer, tax cuts for the rich have a large multiplier effect, and any money lost by governments as a result of lower tax rates will be more than offset by the benefits of faster growth.
Truss is using this logic to defend the £30 billion in tax cuts that Kwasi Kwarteng will announce in his mini-budget on Friday, despite the fact that Laffer was explicit that his theory worked best when personal tax rates were prohibitively high, which he defined as between 50% and 100%. Laffer discovered that lowering taxes at rates below 50% resulted in larger rather than smaller budget deficits.
In actuality, trickle-down did not go as planned. Reagan and Bush cut taxes on the wealthy, but inequality increased: between 1979 and 2005, the income of the top 1% quadrupled, while the lowest 20% saw just a 6% increase. It was a case of trickle-up rather than trickle-down.
Furthermore, Reagan’s combination of tax cuts for the wealthy and a significant rise in defence expenditure led to a tripling of US federal government debt between 1981 and 1989. The US economy developed well in the latter years of Reagan’s administration, although this was a period of increased military expenditure as well as lower borrowing costs following the cripplingly high-interest rates of the early 1980s.
In a 2015 report, the International Monetary Fund dismissed trickle-down and suggested that governments should focus on programmes that directly benefit individuals with low and moderate incomes.
“We find that increasing the income share of the poor and the middle class actually increases growth while a rising income share of the Top 20% results in lower growth – that is, when the rich get richer, benefits do not trickle down,” the IMF said. “This suggests that policies need to be country specific but should focus on raising the income share of the poor and ensuring there is no hollowing out of the middle class.”
US President Joe Biden appears to have taken a dig at Liz Truss only a day before the duo meet in New York, openly criticising “trickle-down economics.”
Mr Biden said he was “sick and tired” of the premise that reducing taxes on corporations and the rich will result in benefits that “trickle down” into the pockets of lower-wage workers.
His remarks come after his British counterpart told New York broadcasters that tax cuts were critical to boosting economic development across the UK.
Liz Truss also defended proposals to eliminate a cap on banker bonuses in an interview with ITV News, admitting that some of her actions “will be unpopular”.
In a message on Twitter, Mr Biden said: “I am sick and tired of trickle-down economics. It has never worked.
“We’re building an economy from the bottom up and middle out.”
Critics of Ms Truss’s low tax plans have widely slammed them as “trickle-down economics” – but the PM has insisted that the only way to grow the economy is to make it “competitive”.
The two presidents will meet on Wednesday in New York, where they will both be attending UN General Assembly activities.
On Friday, the prime minister and Chancellor Kwasi Kwarteng will finalise a mini-budget.
This is projected to result in previously announced increases in corporation tax and a reduction in national insurance, as well as the repeal of a cap on banker bonuses.
While the message was most likely meant for a local US audience, it highlights the economic and political chasm between the Democrat in the White House and the free-market Tory in No 10.
Prior to her meeting with Mr Biden, the Prime Minister met with Emmanuel Macron in New York on Tuesday, following icy remarks between the two during her leadership campaign.
A Downing Street spokesperson said the “leaders agreed to enhance UK-France cooperation on energy to reduce volatility in the market and cut costs for households”.
Despite Liz Truss not previously being able to determine if France was a “friend or foe”, her spokesperson added: “The Prime Minister and President looked forward to strengthening our partnership with France and other like-minded European nations, including through the G7 and NATO.”
“The leaders welcomed the impressive advances made by the Ukrainian Armed Forces in recent days. They agreed on the importance of Ukraine’s friends and allies staying the course and supporting the country militarily, economically, and politically,” added Ms Truss’s spokesperson.
“As our people face a difficult winter with huge uncertainty of energy supply and the cost of living, the Prime Minister and President Macron underscored the importance of working together to end reliance on Russian energy and strengthen energy security. We must continue to demonstrate to Putin that his economic blackmail over energy and food supplies will not succeed.”
Their meeting came after Ms Truss claimed during her leadership campaign that the “jury was out” on whether France was a “friend or foe” despite France being a long-term ally.
Mr Macron subsequently hit back that it was a “problem” if the UK could not call itself a friend of France.
“If the French and British are not capable of saying whether we are friends or enemies – the term is not neutral – we are going to have a problem,” Mr Macron had said.
“So yes of course the British people, the nation which is the United Kingdom, is a friend, strong and allied, whoever its leaders are and sometimes in spite of the leaders and the small mistakes they can make in their speeches.”
Online sources: theguardian.com, itv.com All opinions and views expressed or suggested by the Digital Zeitgeist are not necessarily the same opinions and views held by or suggested by GPM-Invest plus any and all partners, affiliates, parties, or third parties of GPM-Invest. Any type of media distributed by GPM-Invest IS NOT financial advice. Please seek advice from a professional financial advisor