Yesterday, an Englishwoman in New York showed the benefits of – with apologies to Sting – being yourself, no matter what they say. In an interview with Sky News a hundred and two floors up the Empire State Building, Liz Truss launched a broadside against the argument that “cutting taxes is somehow unfair”. Since “people on higher incomes generally pay more tax…when you reduce taxes” they often see a “disproportionate benefit”, she argued. But that doesn’t matter, she continued, since we “should be setting our tax policy on the basis of what is going to help our country become successful”. A spirited defence of tax cuts; a welcome change from a Conservative Prime Minister.
Nevertheless, be prepared to hear a lot about “trickle-down economics” in the next few weeks. Following the expected tax cuts in the Chancellor’s emergency budget mini-budget fiscal event tomorrow, Keir Starmer, Rachel Reeves, and their out-riders will go for the Tories for reducing the tax burden on the rich. Inevitably, “trickle-down economics” is the phrase deployed to describe this. By this, the left suggest we Tories are cutting taxes on the rich on the mistaken assumption that doing so eventually “trickles down” to the rest of society. By giving our friends in the city lower taxes, bigger bonuses, and relief on champagne duties, we are coating our greed with a veil of compassion.
It’s an old routine. Polly Toynbee can dust off the same tedious screed she has been trotting out for forty years. The New Statesman will fulminate, and Ash Sarkar will get retweeted a few thousand times saying something sarky. Meanwhile, we right-wingers will harrumph. Not because we don’t like lower taxes, but because we know the left’s accusations are nonsense. “Trickle-down economics” is a straw man. It is economic voodoo that exists only in progressive fantasies. No centre-right party has advocated for it. Instead, they have made the case that cutting taxes increases growth. It is only those on the left who have droned on about “trickle-down”, whilst we have got on with making everyone better off.
As Thomas Sowell, that great American public intellectual, puts it in his book Basic Economics: A Common Sense Guide to the Economy, “no recognised economist of any school of thought has ever had any such theory or made any such proposal”. As such, it “cannot be found in even the most voluminous and learned histories of economic theories”. According to Sowell, as our own Daniel Hannan has often highlighted, the phrase was first invented by one of Roosevelt’s speechwriters to mischaracterise the economic policies of the Republican Presidents of the 1920s – a period where tax cuts had spurred economic growth and seen the rich pay more in both absolute and proportionate terms.
This perhaps explains the left’s confusion. When they see a Truss (or a Thatcher, a Reagan, or a Coolidge) cutting taxes on the rich, they assume it is because we simply want to make the rich richer. What they don’t understand is that by reducing the tax burden, we are hoping to spur economic growth, bake a bigger economic pie, and further cut taxes across the board. As Hannan pointed out, in 1921, Americans earning over $100,000 were expected to pay an eye-watering 73 per cent in federal income tax, and accounted for only 30 per cent of the total tax yield of $700 million. That top rate was reduced to 24 per cent by 1929 – a year in which more than a billion dollars was paid in income taxes, and 65 per cent came from those earning over $100,000.
Thus reducing taxes made everyone better off – and left the rich paying a higher proportion. It is both better for the economy as a whole, and more progressive, than the socialist solution of simply jacking up taxes on anyone unfortunate enough to have made a bit. At the same time, I might add, the number of taxpayers earning between $10,000 and $100,000 increased 84 per cent, while the number reporting incomes of less than $10,000 fell. All tax rates at lower incomes were also greatly reduced, and the personal exemption for married couples was increased from $2,500 to $3,500. Cutting taxes lead to higher growth, which not only made the economy larger and people richer but allowed for taxes to be cut across the board. Truss could do worse than imitate the economic record of Calvin Coolidge.
So why does the pernicious myth of “trickle-down” persist? Firstly, as the old cliché goes, Tory voters think Labour voters are misguided, but Labour voters think Tory voters are evil. Not every leftie is an unthinking class warrior. But enough genuinely belief that all Conservatives are money-grabbing hucksters whose only political interest is enriching themselves on the backs of the poor – hello, Polly! – that an idea like this persists. That it is, to use the modern parlance, “fake news”, is of no great consequence. The faith relies on it being true, and so it is.
The other reason is, I think, that the left doesn’t entirely get arguments surrounding tax cuts and economic growth. There is a reflex in part of their minds that assumes every tax cut for the well-off must be bad, simply for the fact it is a tax-cut on the well-off. Since wealth is bad, allowing somebody too keep more of it is bad. High taxes on the rich are a good thing in themselves. What they do not get is that the purpose of cutting taxes is to encourage growth and create more wealth for everyone. Hence why they assume any tax cut is a bad thing if it aids higher earners, even if it benefits everyone in the longer-term.
Labour used to get this. The triumph of Mrs Thatcher in the economic sphere meant that after four straight election losses on manifestos based around a return to the tax ‘n’ spend nostrums of the post-war world, Blair, Brown, and Mandelson (at least) initially realised an efficient, lower tax economy would produce the wealth they wished to see redistributed. Hence the famous Mandelson quote about New Labour being “intensely relaxed about people getting filthy rich, as long as they pay their taxes”.
Unfortunately, this instinct became muddled as Brown embarked upon his huge borrowing and spending spree in the early and mid-2000s. That culminated with what actually might be the closest thing to “trickle-down” that we have had: the ginormous government bailout in 2008 to the bankers who had brought global capitalism to the brink of ruin. Truss should point this out when Starmer et al start sounding off.
Although Osborne had some success with bringing down income and corporation tax and seeing revenues rise, and though Johnson doffed his cap to Ibn Khaldun whilst running for the leadership, the case for cutting taxes, going for growth, and making everyone from South Kensington to, erm, North Kensignton better off has not been made for a while. Both May and Johnson ceded economic territory to the left. Truss hopes to reverse this. If she is willing to court unpopularity in making the case for tax cuts, then best of luck to her.
So whilst I pull my hair out at the Bank of England’s rate decision today and then the ludicrous levels of borrowing the Chancellor announces tomorrow, I do at least have something to cling to. If I have been wrong about Trussonomics, if her firm faith in tax cuts does reap the rewards that she hopes, then it will be because she happily and forcefully disproved a pernicious left-wing myth. She has also given me the chance to write my “trickle-down economics” piece that I can trot out once a year for the next forty odd years or so.