Wednesday, August 26, 2015

Dan Hannan on why "Trickle-down economics" is a Left-wing fantasy

I've previously linked to articles by Dan Hannan MEP debunking the caricature of so called "trickle down economics" which is what some people on the left think people on the right believe. We don't.

But he has to keep coming back to it because as he rightly says, it's a "zombie idea" in that no matter how often you kill it, this straw man which is supposed to be what free-marketeers believe keeps coming back. Search on the internet for "trickle down economics" and you'll find many articles  debunking or disproving it, some by authorities as senior as the International Monetary Fund, but you'll have enormous difficulty finding anyone at all who will claim to believe in it.

Economist Thomas Sowell made the case] that no economist has ever advocated a "trickle-down" theory of economics, and that it is rather a misnomer attributed to certain economic ideas by political critics who either willfully distort or misunderstand the actual stated goals of their political opponents.

There is a great video of Thomas Sowell explaining this on the Speccie website at

What free-marketeers on the right DO believe is that if you set tax rates too high you will destroy incentives, reducing productivity and investment. There is lots of evidence that if you reduce taxes from punitive levels - at or above 50% - to levels which still leave the state with a significant share of any extra income people earn but leaves them more than half of it, you can actually increase the amount of tax revenue paid by the rich.

There is strong evidence that this happened after the 1979 Conservative budget which slashed the top rates of tax from 87% and 98% to 40%. The proportion of income tax, and the absolute amount of income tax, paid by the richest 1% of people didn't fall: it dramatically rose. Which meant more money available to spend on things like the NHS.

The difference between the view that there is an optimal rate of tax, and it isn't a punitive rate, and the mythical "trickle down theory" is that the latter suggests that governments don't need to do anything but make the rich richer, and this will somehow magically feed through to making everyone else richer as the rich spend their money (or save it depending on which version of the straw man the left have put up to be knocked down again. As Dan Hannan says at the end of this video, what people who oppose punitive rates of tax are saying is the opposite, that they want the rich to pay more tax - and the best way to do that is not to set ridiculously high tax rates.


Jim said...

The way i see things is much simpler. If the tax rate is so high, that it costs less to employ a creative accountant to keep more, then you had better believe that is what people will do. if the tax rate is lower, then its not worth doing so and its cheaper to pay it. So far more people do.

Its all a nice thought, ultra tax the mega rich, but it has two fatal flaws.

1. There are not enough of them

2. They can afford the best of the best of accountants, so the office cleaner ends up paying more in tax than the CEO does.

The tax system is deliberately very complex, its almost impossible to work out on a month by month basis how much you did actually pay in tax. Its designed to be that way.

You see a tax rate of 20% never really is, sure thats the income tax, after threshold, but then there is NI, VAT on things, Duty on other things, plus VAT on duty, and council tax, plus any property gains or others.

The whole system being more simple and clear cut would be honest, but lets face it, no one wants to do that. That's why it takes the clever accountant only the rich can afford to do it. That's why the laffer curve is the way it is.

Jim said...

I think you made a typo there, "Lower, simpler taxes are usually far more effective - and raise no money"

i think should read and raise more money

Also have joined you in tax avoidance, been off the ciggys for 1 week now, think I can actually do this. Must admit, whilst it was not the tax incentive that did cause me to quit in the end, it is a nice thought that keeps me going :)

i know its not exactly something to shout from the roof tops about, 1 week off the cigarettes, but for me that is an eternity and a first.

Chris Whiteside said...

Thank you, I had indeed written "no" where I meant to write "more"

Should have read as follows:

I think you are saying something similar to what Dan is saying and I agree. There are lots of political reasons for high taxes and complex taxes, but they don't work. Lower, simpler taxes are usually far more effective - and raise more money.

Which is not the same as "trickle down" economics which nobody believes in.