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There is no trickle-down effect from tax cuts for high income earners, writes Sharon Beder.
MALCOLM Turnbull argues that we should lower the top tax rate because it reduces the incentive of high-income earners to work hard and invest in productive activities.
If you thought the argument sounded familiar, you're right: it is a rehash of supply-side economics which has been in disrepute since Ronald Reagan tried it in the 1980s. The results of that experiment discredited the theory once and for all, except among diehards who use it as a convenient rationale for tax cuts for the rich.
Reagan's experiment assumed higher incomes resulting from tax cuts would be spent by entrepreneurs on investment that would increase production and create jobs. As a result more taxes would be collected, despite being paid at a lower rate. This was because profits would be higher and more workers would be paying taxes.
Supply-siders argued that taxes and regulations raise the cost of entrepreneurship, reducing the returns that can be made from economic ventures. This reduces the willingness of entrepreneurs to take risks, causing the economy to stagnate.
Supply-side arguments did not have much credence among economists but they were politically popular among higher-income earners and businesses for obvious reasons. It was primarily promoted by a group of journalists at The Wall Street Journal. Other advocates included Irving Kristol, editor of the neo-conservative journal The Public Interest, some congressional staffers, a few consulting firms and many conservative think tanks.
Looking back on the supply-side era, The New York Times columnist Paul Krugman has pointed out that supply-side economics had been supported by "a handful of wealthy cranks" and "an impressive-looking array of think tanks, research institutes, foundations, and so on", which are in turn funded by the rich and powerful.
Similarly, Sidney Blumenthal, in his book The Rise of the Counter-Establishment, argued that supply-side economics "travelled from lunatic panacea to official catechism in a few short years". It had popular appeal because of its "have your cake and eat it too" message. Blumenthal said "the gnostic supply-siders made claims to knowing the secret of endless wealth: the magic of the market place, a theory for the multitude of go-getters, promising that the cornucopia was bottomless".
This optimism helped Reagan to get elected, despite George Bush snr labelling supply-side theories "voodoo economics" when he was a rival candidate for presidential nomination in the 1980 primaries. Reagan's campaign advertisements promised tax cuts that would make everyone better off. The ads said: "Ronald Reagan believes that when you tax something, you get less of it. We're taxing work, savings, and investment like never before. As a result, we have less work, less savings, and less invested."
Supply-side economics failed to deliver. Reagan's tax cuts did not lead to higher incomes, greater economic growth, increased employment or increased savings. Therefore less taxes were collected and budget deficits increased with a tripling of the national debt.
Reagan's budget director, David Stockman, later told The Atlantic Monthly the 1981 tax cut was a "Trojan Horse to bring down the top [tax] rate" for the wealthy.
Supply-side theory was a reformulated version of the "trickle-down" theory that if the rich are richer they will invest more and the extra wealth created will "trickle down" to the poor. Describing this theory J.K. Galbraith said: "If one feeds the horse enough oats, some will pass through to the road for the sparrows."
However the reality was that 80 per cent of the workforce experienced a decline in real wages after Reagan was elected, while the wealthiest 20 per cent of families had spectacular increases in wealth - 100 per cent increases for the top 1 per cent and 30 per cent increases for the top 5 per cent.
There is no reason to believe that tax cuts for the wealthy in Australia will benefit anyone but the rich. It is the latest bid to destroy progressive taxation and with it any lingering ideal of Australian egalitarianism, in order to line the pockets of those who already have large incomes.
Professor Sharon Beder is in the school of social sciences, media and communication at the University of Wollongong. Louise Dodson's column will return next week.