History suggests that policies relying on “trickle-down economics” are destined to fail, and yet the idea, for some, still persists. David Hope explains why tax cuts for top earners only benefit the rich and why the issue is so controversial to discuss.

When then UK Prime Minister Liz Truss and Treasurer Kwasi Kwarteng sparked economic turmoil by announcing unfunded tax cuts for top earners, it created one of the most extraordinary political crises in UK history. Their “mini budget” spooked the markets and was widely condemned for appearing to rely on the discredited theory of “trickle-down economics”. But it’s an idea that has persisted: the last 50 years has seen a dramatic decline in taxes on the rich across advanced democracies.

In research first published as a working paper in 2020, David Hope and Julian Limberg analysed the economic effects of major tax cuts for the rich across five decades in 18 wealthy nations. Their conclusion: the rich got richer and there was no meaningful effect on unemployment or economic growth. The paper became the most downloaded in LSE Research Online history, with about 150,000 downloads. Dr Hope referred to economist Thomas Piketty, arguing that cutting taxes on the rich leads them to bargain more aggressively for their own compensation at the direct expense of workers lower down the income distribution.

Dr Hope added: “I think the paper has one major and fairly obvious policy implication, which is not to cut taxes on the rich to boost the economy, particularly if you care about inequality.” When Donald Trump introduced the Tax Cuts and Jobs Act in 2017, he claimed it would be “rocket fuel” for the US economy. “We don’t find any evidence in our study across 18 advanced economies over 50 years of that being true.”