Fair growth

“It will trickle down”

Nope. They’ll build spaceships with it.

So reads a popular message on social media. We know that the wealthy live in a very different world from the majority, and experience things like inflation differently. It means that tax cuts for the wealthy may bring some growth – but it is likely to be a very different form of growth from that which would come from poorer members of society having more money (whether that might be through lower taxes, more social security benefits, or simply being paid higher salaries). Even those who believe that growth in GDP (a very narrow definition of human success) is a good and desirable thing need to be thinking about not just growth but fair growth.

In considering whether growth is fair, we also need to consider what actions may best deliver greater growth. And there is strong evidence that lowering taxes for the wealthy leads to much lower growth than more broadly-based tax reductions.

In a 2019 study Owen Zidar, now Professor of Economics and Public Affairs at Princeton University, used differences between the distribution of incomes in different US states to provide a series of natural experiments giving insight into what the impact of changes in tax rates at different parts of the pay scale are on growth.

Zidar’s conclusion is simple:

“If policy makers aim to increase economic activity in the short to medium run, … tax cuts for top-income earners will be less effective than tax cuts for lower-income earners.”

He also finds:

“the positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups and the effect of tax cuts for the top 10 percent on employment growth is small.”

This shouldn’t be surprising – the growth sparked by lower income households having higher spending capacity is likely to be spent locally, rather than spent on more esoteric, often imported high status goods or international experiences (let alone spaceships!). Growth sparked by lower income households is also certain to be more geographically spread across a given country given the way the wealthy concentrate themselves in a limited number of places (a physical reflection of the metaphorical different world in which they live). Given the way we define GDP, shifting activity back into the economic zone from charitable activity – such as buying goods in supermarkets rather than reliance on foodbanks – will also be reflected in growth figures.

The world is worried about anaemic growth. In large part, this has arisen because of the persistent downward pressure on middle class pay levels. Addressing that directly may offer a better response to the challenge than any other. Fairer pay for these workers – whether or not sparked or supported by tax or social security changes – may provide the best route to fair growth.

See also: Inflation’s two separate worlds (at least)

The growth myth

The centre cannot hold

Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment, Owen Zidar, Journal of Political Economy, 2019, vol. 127, no. 3

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