The economic argument for lower marginal tax rates on higher incomes is not that giving rich people more money will make them generously sprinkle it over the poor
The real question is not whether the rich are getting more than their ‘fair share’ but whether Britain can afford to keep punishing work, saving, investment, and enterprise
In a recent speech, Andy Burnham, Makerfield’s new MP and likely our next PM, said he would end ‘trickle-down’ economics. What on earth was he talking about?
The Left often accuses the Right – and particularly the last Conservative government – of practising this voodoo art form. Supposedly, right-wingers give tax breaks to the ‘rich’ in the sure and certain hope that these tax breaks will ‘trickle down’ to the poor. Or, as is often asserted, they might do so to curry political favour from their ‘mates’. After all, as Peter Manion said in The Thick of It, ‘some of my best friends are money-grabbing w*****s’.
As a description of the last Tory government’s actions, nothing could be further from the truth. Between 2010 and 2024, the only group who saw their direct tax bill increase were the top 10% of income earners. Today, the top 10% of income earners earn 34% of the income, but pay 59% of the income tax, up from 55% in 2010. If successive Tory Chancellors believed in a supposed ‘trickle-down’ theory, they were incompetent at executing it.
But perhaps Burnham was just using ‘trickle-down’ as a pejorative term for the real – if unimplemented in recent years — theory of supply-side economics.
‘The economic argument for lower marginal tax rates on higher incomes is not that giving rich people more money will make them generously sprinkle it over the poor’
This theory comes from the blindingly obvious observation that taxes affect behaviour. At some tax rate, most of us would choose not to work so hard, or we would choose to spend our money today, rather than risk it on an investment. For the wealthy, this becomes more binding. For the second income earner in a high-income household, for instance, work is effectively optional. At a high enough tax rate, they might choose to forgo it altogether. The same is true of entrepreneurship and investment. People do not stop wanting money because they are taxed more. But they may decide that the extra return is no longer worth the extra risk, effort, stress, or delay. They could also just move to Dubai, Singapore, or even Italy.
So, the economic argument for lower marginal tax rates on higher incomes is not that giving rich people more money will make them generously sprinkle it over the poor. It is that the prosperity of ordinary workers depends on the management, capital, and ideas they work with. A builder with better machinery, a software engineer at a more innovative firm, or a factory worker with a better manager can produce more in an hour. In a competitive labour market, that higher productivity means higher wages.
This effect isn’t instant. And its size isn’t certain. But the direction is clear: Higher taxes on high earners ‘trickle down’ into lower wages for ordinary people. As Charles Jones, the respected Stanford macroeconomist, put it in a recent article, ‘by slowing the creation of new ideas that drive aggregate GDP, top income taxation reduces everyone’s income, not just income at the top’. The same logic applies to the accumulation of capital or even the application of management skill.
Burnham’s phrase is useful politics, because it turns an argument about trade-offs into a story of morality. On one side are the greedy rich (the bad guys, usually on the bluer end of the colour chart), and on the other are the decent many (the good guys, currently on a train down from Wigan). But the real question is not whether the rich are getting more than their ‘fair share’ but whether Britain can afford to keep punishing work, saving, investment, and enterprise, and then act surprised when there is less of them.
Instead of the politics of envy, ‘the King in the North’ should look to Manchester’s proud history of liberalism – in the British sense – for inspiration. During Britain’s industrial and imperial heyday, it was Mancunians like Richard Cobden and John Bright who made the case for the abolition of both slavery and protectionism. These practical Northern men understood that excess taxation – both directly and indirectly – falls hardest on the aspirational working and middle classes.
A Burnham-led Labour government could learn from this proud radical heritage – and rescue this country from its malaise. Or, it could continue with the failed redistributionist policies of the past 29 years and continue to stagnate. Let us see which path he chooses.
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