Recently, the International Monetary Fund acknowledged that tax cuts for the rich do not aid the rest of the citizens in a particular society. In their latest study, the IMF examined what impact tax cuts have on the economies that undertake them. They found that while tax cuts, in general, stimulate the overall economy, they also increase inequality. Also, they found that the cuts that target the top 25% of the wealthiest individuals, like the Australian Turnbull government underwent in the last year do not have the power to raise the financial status of the majority.
Australian government last year spent a lot of time explaining why the country needs a tax cut for those who were earning over $80,000 on an annual basis, arguing that the cuts will pay for themselves. The government argued that the same individuals represent the middle class, in spite of the fact the figure far exceeds the median middle-class earnings level which stands at about $50,000. In the end, the decision was made to provide a 2% tax cut to the citizens that earn more than $180,000 along with a Medicare levy increase of 0.5%. This led to the fact that everyone earning under $240,000 had actually got a tax raise.
The concept of the self-funding tax cuts has been in play ever since it came about under US President Ronald Reagan back in the 1980’s. The theory of tax cuts that paid for themselves over increased growth has not shown to be true. In 2006 a study by the US Treasury found that tax cuts produced a fall in the revenue for the government that was only partially compensated by other tax raises introduced by Reagan. However, the myth keeps propagating itself over the years, even though the study examines a US-style economy. In it, it was clearly shown that tax cuts for the high-income households, but also the middle-income ones bring down tax revenues. At the same time, the study showed that it is undeniable that the cuts cause growth because people with more money will likely spend it on the economy and thus support it. However, the growth actually came about for the high-earning segment of the population that attained the tax cuts.
The study also showed that tax cuts that were focused on the middle-income population managed to increase the middle-class size by around 4%. It was also able to significantly reduce inequality, even if the same is paid by elevating consumption taxes. All of this challenges the notion of economic growth needing the sacrifice of equality. Now, numerous studies found that a reduction of inequality actual aids economic growth over the long run. The study by the IMF showed that governments that provide tax cuts to the high-income population offer economic growth for a small minority while they reduce the welfare of the overall majority.