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Prime Minister Liz Truss halts her controversial tax plans. But can “taxes down, wealth up” work? Yes, says economist Christoph Schaltegger – if you do it right.
“With low taxes, we create opportunities and jobs for everyone,” calculated British Prime Minister Liz Truss. She used a formula popular with liberals: if the rich and the corporations are doing well, then everyone is doing well.
Now Truss has withdrawn her controversial tax plans. The top tax rate for top earners of 45 percent will not be removed.
But what about the “trickle down” effect of economic theory: does prosperity actually trickle down from the wealthy to the middle class and ultimately to the poor?
“The simple solution – relieve the rich, strengthen the poor – only exists in paradise,” explains the Swiss economist Christoph Schaltegger. “In a social reality, it’s more complicated.”
Lower taxes, higher growth: The world is not that one-dimensional.
“Trickle down” was a kind of mantra of Ronald Reagan’s presidency in the USA in the 1980s. According to the professor of political economy, there were no paradisiacal conditions: “Inequality and polarization increased sharply at the time.”
Legend:
During the 1992 election campaign, future US President Bill Clinton (on the right, next to Ronald Reagan) castigated the trickle-down tax policy: “For twelve years, America stopped investing in its people and stopped growing. We ended up twelfth out of the countries with the highest wages.”
Keystone/Archive
So there is no automatism towards prosperity for all. The political left even speaks of a fairy tale: tax cuts for the wealthy can never be in the public interest.
Here, too, Schaltegger intervenes: “The position that the tax screw has nothing to do with the prosperity of the masses is also incorrect. Then cantons and countries with high taxes would have to be particularly well-developed medium-sized companies with a low spread of income. » And this is precisely what cannot be seen.
Fiscal policy, when embedded in overall economic policy, can have an enormous impact.
One famous study on the OECD countries does not banish the “trickle down” effect to fairy tale land. However, she comes to the conclusion that such tax cuts would not have brought any economic growth in the countries examined.
Taxes down, growth up: the world is not that one-dimensional, says Schaltegger. “But tax policy, when embedded in overall economic policy, can have an enormous effect.”
Obwalden becomes a donor canton
The economist cites Obwalden as an example. At the beginning of the 2000s, the canton was one of the financially weakest in Switzerland. Then he opted for an attractive tax burden on the company as well as on the income side, as is also the case in Zug.
In fifteen years, Obwalden has developed into a donor canton in national financial equalization. “Not only has it become a rich canton at the top, but overall the income positions have improved significantly,” says the professor at the University of Lucerne.
A matter of timing
The low taxes attracted wealthy newcomers. “At the same time, the transport links to the centers where jobs are located have been improved. All of this has led to an increase in the median income.”
Legend:
Schaltegger’s verdict: A holistic economic policy in the canton of Obwalden meant that middle classes were also able to benefit from the tax reform.
Keystone/Urs Flueeler
“The canton of Obwalden is an example of where society moves in a convoy: if the upper income earners are doing a little better, the others are doing a little better too.”
In general, however, tax cuts would have to be financed sustainably in order to generate growth. “If they are only financed through debt, this cannot work out in the long term,” concludes the economist. “In addition, the timing has to be right.”