Trickle-down economics is dead. It’s time to tax the rich harder

Pressure is building on Rishi Sunak to tax the City financiers and business owners that conventional Tory thinking states will quit Britain – or, less theatrically, restrain their entrepreneurial instincts – if they are forced to contribute more to the communal pot.

Study after study shows that the tenets of free-market thinking are deeply flawed and that nations that follow a tax-cutting agenda do nothing for the underlying strength of their economies.

The latest examination of the subject comes from the London School of Economics. It studied fiscal policies in 18 countries over 50 years and concluded that tax cuts for the rich have never trickled down and only really benefit those individuals who are directly affected.

The paper found that cutting the top rates of tax filled the pockets of higher earners and increased inequality. It did little, if anything, to stimulate business investment.

This might seem obvious to anyone on the left of the political spectrum, who will have long since dismissed the trickle-down theory of economics. But it is a mantra on the right and remains a cornerstone of the argument for tax cuts.

Mitch McConnell, the Republican Senate majority leader, took pains to say goodbye to Donald Trump with a list of achievements over the last four years. One that made him particularly proud was the economic boom that was kicked off by the biggest tax cuts for the rich since Ronald Reagan’s time in the Oval Office.

This, he argued, had given rise to pay rises across the board, and especially for low-income workers. And he is not the only rightwing politician or thinktank economist in the US to credit the cuts with a boost to investment and wages.

What he failed to mention is that individual states have spent the past four years increasing their minimum wage rates following years of stagnation, sometimes by almost double. Nothing to do with Trump.

Back in the UK, George Osborne cut the top rate of tax from 50p to 45p in 2012 with the support of business leaders and economists, including two former members of the Bank of England’s monetary policy committee, DeAnne Julius and Sushil Wadhwani, who said the higher rate he inherited from Labour “punished” entrepreneurship.

Shareholders have occasionally slapped the wrists of executives, but not much else

Several years later, Osborne hailed the move as a money-spinner. He said Britain’s highest earners had generated so much extra income, encouraged by the tax benefit, that they had paid £8bn in extra tax to the exchequer.

But what Osborne failed to say was that tax payments were held back in the year before his policy came into effect and then paid the following year at the lower rate. This deferral was a sleight of hand, a distortion, and, in the end, supported an economic fallacy.

Meanwhile, if anyone needed persuading that the problem of runaway boardroom pay is acute in the UK, a report last week by the High Pay Centre does the trick.

The study reveals that Ocado’s chief executive, Tim Steiner, was paid £58.7m last year – a sum that is 2,605 times the £22,500 paid to the online grocery delivery company’s staff on average. Retailer JD Sports paid its chief executive, Peter Cowgill, £5.6m. This was 310 times the average £18,300 paid to staff.

Executive pay is one way to remunerate corporate bosses. More lucrative are the share options that are taxed as capital gains, at a much lower rate.

Some campaigners say the best way to tackle the problem is to empower companies’ shareholders, who will then impose strict limits on executive pay. Others say workers on boards would take the campaign into the boardroom, with radical results.

The German experience suggests that putting workers on boards has done little to limit soaring pay at the top. Likewise, shareholders have occasionally slapped the wrists of executives, but not much else.

Higher taxes are the only way. And they cause no harm, except to the bank balances of those they target.

Sobered-up Britain leaves pubs and bars heading for last orders

It’s no secret that bar and pubs are in trouble, with thousands at risk of permanent closure. Early data on annual alcohol sales, revealed in Saturday’s Guardian, underline the scale of the problem.

The prevailing narrative has been that lockdown is driving us to drink. It seems to make sense, after all, what else is there to do? But while there’s evidence to support an alarming rise in excess drinking among certain cohorts, the overall picture is very different.

Supermarkets, free to trade throughout the pandemic, have been making out like bandits when it comes to alcohol sales. The flipside of that coin, indeed the reason for it, is that tens of thousands of hospitality venues have been shuttered for much of 2020.

December sales, which can account for a quarter of venues’ annual profit, are predicted to be 90% down on last year, a hit of £650m.

The dynamics are pretty clear: those who can’t drink on a night out with friends or colleagues are doing so at home instead. However, the two trends do not cancel each other out.

The Wine and Spirit Trade Association reports a 10% fall in beer sales and 5% fall in wine. Even gin’s winning streak is over, with overall sales down from £2.6bn to £2.2bn.

On balance, Britain is more sober than it was in 2019. This may deliver public health benefits but for hospitality venues – singled out at as high-risk even as shopping centres throng with Christmas bargain-hunters - it’s a slow-motion tragedy.

Those who don’t serve food got nothing out of VAT relief or “eat out to help out”. The £1,000 grants on offer in tier 3 are laughably small, less than a night’s takings in some cases.

Pubs and bars are drifting towards the point of no return, with thousands destined to be converted into posh flats or offices for a lucrative property investment.

The question now is whether the government is as comfortable with that prospect as it seems to be.

Unilever’s green conversation with investors is not just for show

Here’s a shareholder vote that the board of Unilever should find easier to win than the one it held a couple of years ago on the madcap plan (which was eventually dropped) to move the company’s domicile to the Netherlands: do you like our climate commitments or not?

Any Unilever shareholder who is unaware that the company nowadays preaches a gospel of sustainable capitalism must be living under a rock, so a roar of approval is the way to bet. In any case, the result of the vote will not be binding on the board.

That advisory feature prompts a different question: what’s the point of it? Is this an exercise in virtue signalling, or is there a serious purpose?

It’s the latter. One goal is transparency – always an advantage. Another is setting visible short-term targets to be met on the way to reaching Unilever’s long-term aims, such as “net zero emissions from sourcing to the point of sale, by 2039”.

Votes like this one will happen every three years, starting at next May’s shareholder meeting, and the board will report on progress against the plan annually. The company’s climate commitments “are only as good as our delivery against them,” says the chief executive, Alan Jope.

Unilever is not quite the first company to put its climate transition plans to a regular vote – Aena, the Spanish airport-management company, got there in October – but it is a large multinational with significant influence.

One suspects that this might be the start of a trend. ESG – or environmental, social and governance – investing is the biggest growth area in town, but conversations between shareholders and boards can often feel unstructured. A detailed set of climate policies, capable of being voted on and capable of being measured, provides focus. This is a smart move by Unilever.