You have to feel for people living in Great Britain right now. As if the recent injury of losing their Queen, the insult of having to endure King Charles and the prospect of a cold and expensive winter weren’t bad enough, they also have a new prime minister who seems determined to crash their economy and ruin their retirements.
In Liz Truss’s first financial update after winning the leadership of the Tories and replacing Boris Johnson, she and her chancellor of the exchequer Kwasi Kwarteng tried to channel Margaret Thatcher by slashing the country’s top tax rate from 45 per cent to 40 per cent. This was a leadership campaign promise they were determined to fulfil, one they believed would help Britons deal with soaring inflation and reverse the country’s fortunes. But rather than stimulating Great Britain’s economy, she very nearly killed it — and with it, perhaps, the notion that supply-side economics (the theory that underpinned the policies of Thatcher and Ronald Reagan) is a good fit for the challenges of the 21st century.
The new package of economic measures, which also removed a cap on bonuses that bankers can receive, sent the British pound spiralling down to its lowest level ever against the U.S. dollar. It pushed global stock markets to new yearly lows, required the Bank of England to buy £65 billion in government bonds and even drew criticism from the International Monetary Fund and Moody’s.
It was just the latest example, and perhaps the most expensive yet, of why the country’s decision to leave the European Union was really an act of economic suicide. One wonders whether the Canadian politicians who were so vigorously cheerleading the vote at the time — Andrew Scheer, Jason Kenney and Pierre Poilievre — will finally put their populist pom-poms away for good.
Truss’s government ultimately backtracked on the tax cut (ironically, just a day after she said it wouldn’t), but the damage to her reputation and Great Britain’s economy was already done. The Truss tax cuts are the latest example, albeit the most spectacular one in recent memory, of the high cost of cutting taxes for the rich.
So far, these examples have done little to deter conservatives from continuing to pursue these sorts of policies. If anything, the belief that cutting taxes for rich people can attract investment, increase productivity and raise government revenues remains a core part of conservative orthodoxy across the western world. It kept many otherwise reluctant Republicans bound to Donald Trump’s ideologically incoherent regime, and he delivered for them with his administration’s 2017 “Tax Cuts and Jobs Act,” a $2.3-trillion giveaway to high-income earners and corporations.
At the time, Treasury Secretary Steven Mnuchin claimed that “not only will this tax plan pay for itself but it will pay down debt.” That’s a familiar promise that routinely gets made (and subsequently broken) whenever conservatives are trying to cut taxes for the rich.
As Jim Tankersley noted in a recent New York Times piece, a pair of economists at the Urban-Brookings Tax Policy Center in Washington studied the pre-COVID impact of Trump’s tax cuts — and found them deeply wanting. “The cuts did little to promote job growth or investment outside the oil and gas sector, which is highly correlated with the global price of fossil fuels,” Tankersley wrote. “And they found that the cuts significantly reduced federal tax revenues, contrary to Republicans’ promises that the cuts would pay for themselves by inciting additional economic growth.”
Princeton economist Owen Zidar’s study, one that covers decades of tax-related data in the United States, goes even further. “The stimulative effects of income tax cuts are largely driven by tax cuts for the bottom 90 per cent,” it concludes, “and that the empirical link between employment growth and tax changes for the top 10 per cent is weak to negligible over a business cycle frequency.”
Opinion: Old habits die hard, and few habits are older for conservatives than pushing tax cuts for the rich, columnist @maxfawcett writes for @NatObserver.
Translation: if you want to create jobs, cut taxes for the working and middle classes instead.
But old habits die hard, and few habits are older for conservatives than pushing tax cuts for the rich. Witness the recent piece in the Toronto Sun by Matthew Lau, an adjunct scholar at the Fraser Institute, that took aim at the federal government’s plan to tax luxury goods. “Even if the goal of tax policy is to maximize government revenues — which it should not be in the first place — reducing the income tax rate on top earners is probably a better idea than increasing it,” he wrote.
This is the orthodoxy to which Lau, Truss and the UCP’s Danielle Smith subscribe: no matter the circumstance or context, cutting taxes on the rich is always a good idea.
Truss may have cause to question that logic, given she could end up losing her job as a result of her failed attempt to cut taxes. But you can be sure Canadian conservatives, whether it’s the UCP’s Smith or the CPC’s Poilievre, will almost certainly ignore the lesson Truss is being made to learn.
The real question is who ends up paying the price for that — and how expensive it will be.