In that post, Fraser Nelson writes:
When [Nigel Lawson] reduced the top rate to 40% he unleashed wealth creation and the government profited by taking a smaller slice of a much bigger pie.
In the absence of any elucidation, this is the post hoc ergo propter hoc fallacy. It is the case that the rich have gotten richer (pdf) in recent years, but it’s not obvious that Lawson’s tax cut caused this.
Take the data (excel, reported in this pdf) on the incomes of the richest 0.1% of the population, as complied by Thomas Piketty and Emmanuel Saez. These show that the share in GDP of the top 0.1 per cent of the UK population actually rose more slowly in the seven years after the cut ( in 1988) than they did in the seven years before. If Lawson had “unleashed wealth creation” one would expect the opposite to have happened.
It’s only after the mid-90s that the incomes of the top 0.1 per cent really accelerated.
Also, the incomes of the rich rose even faster in the US and Canada after Lawson’s cuts. It’s unlikely that Canadians and Americans were motivated to work harder by cuts in UK taxes.
All this suggests an alternative hypothesis. What “unleashed wealth creation” was not Lawson’s tax cuts, but the vast growth of the financial system.
This hypothesis is consistent with the fact that the incomes of the top 0.1% grew slowly from 1988 to the mid-90s - the City did not boom then - and faster thereafter. And it's consistent with the rise in top incomes in the US at the same time as the UK.
Granted, Lawson’s tax cuts might have contributed to this. But then again, they might not. Tax rates are higher in New York than the UK, and this didn’t stop rich Americans getting richer.
You might object that the incomes of the top 0.1% aren’t what Fraser means by “unleashing wealth creation.”
So, let’s look at an alternative measure - labour productivity in the whole economy. If Lawson’s tax cuts had stimulated the rich to work harder, you’d expect this to have risen since 1988 partly for purely arithmetic reasons - the rich’s labour counts too - and partly because greater effort by managers stimulated their staff to work harder.
Except that it hasn’t. In the last 20 years, productivity has grown by 1.8% a year. In the 20 years before Lawson cut taxes - a period that included the appalling industrial relations of the 1970s remember - it grew 2% a year*.
This suggests an alternative theory. Lawson’s tax cuts allowed high earners to retire earlier - because they reached their target level of retirement wealth quicker, and because their savings were taxed more lightly. This deprived the economy of a cadre of experienced workers and managers, with the result that productivity has suffered.
Is this theory correct? I don’t know. What I do know, though, is that the raw claim that tax cuts “unleashed wealth creation” is highly arguable. It has a strong basis in self-interest and prejudice, but a weaker one in theory (ever heard of income effects?) and evidence. Not, of course, that the evidence matters.
* Code identifier LNNN here.
Take the data (excel, reported in this pdf) on the incomes of the richest 0.1% of the population, as complied by Thomas Piketty and Emmanuel Saez. These show that the share in GDP of the top 0.1 per cent of the UK population actually rose more slowly in the seven years after the cut ( in 1988) than they did in the seven years before. If Lawson had “unleashed wealth creation” one would expect the opposite to have happened.
It’s only after the mid-90s that the incomes of the top 0.1 per cent really accelerated.
Also, the incomes of the rich rose even faster in the US and Canada after Lawson’s cuts. It’s unlikely that Canadians and Americans were motivated to work harder by cuts in UK taxes.
All this suggests an alternative hypothesis. What “unleashed wealth creation” was not Lawson’s tax cuts, but the vast growth of the financial system.
This hypothesis is consistent with the fact that the incomes of the top 0.1% grew slowly from 1988 to the mid-90s - the City did not boom then - and faster thereafter. And it's consistent with the rise in top incomes in the US at the same time as the UK.
Granted, Lawson’s tax cuts might have contributed to this. But then again, they might not. Tax rates are higher in New York than the UK, and this didn’t stop rich Americans getting richer.
You might object that the incomes of the top 0.1% aren’t what Fraser means by “unleashing wealth creation.”
So, let’s look at an alternative measure - labour productivity in the whole economy. If Lawson’s tax cuts had stimulated the rich to work harder, you’d expect this to have risen since 1988 partly for purely arithmetic reasons - the rich’s labour counts too - and partly because greater effort by managers stimulated their staff to work harder.
Except that it hasn’t. In the last 20 years, productivity has grown by 1.8% a year. In the 20 years before Lawson cut taxes - a period that included the appalling industrial relations of the 1970s remember - it grew 2% a year*.
This suggests an alternative theory. Lawson’s tax cuts allowed high earners to retire earlier - because they reached their target level of retirement wealth quicker, and because their savings were taxed more lightly. This deprived the economy of a cadre of experienced workers and managers, with the result that productivity has suffered.
Is this theory correct? I don’t know. What I do know, though, is that the raw claim that tax cuts “unleashed wealth creation” is highly arguable. It has a strong basis in self-interest and prejudice, but a weaker one in theory (ever heard of income effects?) and evidence. Not, of course, that the evidence matters.
* Code identifier LNNN here.
...experienced workers and managers...
You acknowledge the managers, Chris?
Posted by: jameshigham | September 30, 2008 at 04:08 PM
I know a GP whose response to their recent remunerative pay deal was to work fewer hours. That's presumably due also to the way that the government has made the job less satisfying by undermining his autonomy.
Posted by: dearieme | September 30, 2008 at 05:05 PM
That's an interesting theory about earlier retirement and lower productivity.
Posted by: Frank Pollacco | September 30, 2008 at 07:18 PM
Yes the evidence does not matter either way, its a matter of principle that people should be taxed as lightly as possible, and the state should not intrude in the citizens life without good reason. It seems to me to be a value judgment. It applies to rich and poor alike. All we are creating with a larger and larger state is snowball bureaucracy, and a manager class to run it.
Posted by: passer by | September 30, 2008 at 09:37 PM
True to my nom-de-plume, I am curious to know if "gotten" is now the accepted past participle in English English.
Posted by: pedant2007 | October 01, 2008 at 04:03 AM
passer by - The right to own private property is a right defined by the state. Since the private property allows for the accumulation of rent, private property is a state sponsored wealth distribution from the propertyless to the propertied.
Why is this state enforced redistribution of wealth acceptable, but others are not?
Posted by: Andreas Paterson | October 01, 2008 at 03:47 PM
Andreas -- it's only redistibution if it goes *from* the wealthy. If it goes *to* the wealthy, it's the free market at work, proof that god's in his heaven, and as unassailable as gravity.
Posted by: Barrayaran | October 05, 2008 at 07:55 AM
The company I worked for had a pay freeze last year while personal expenses rose.
A good proportion of the staff were working longer hours to make up for the shortfall, so it appears that more people are motivated by hardship than wealth.
If I reached a target level of wealth I'd retire on the spot...
Posted by: Paul | December 19, 2009 at 10:05 PM