Tax: The Precedent of the United States

Tax: The Precedent of the United States

This week, George Osborne bowed to public (and Lib Dem) pressure to put off any definitive decision on the 50p tax rate on high earners. However, The Sunday Times still devoted its front page, a two-page spread and an editorial to trying to convince us that it would be in all of our best interests if the richest 1 per cent paid less tax. The idea is simple: if we want the world's top businessmen and women to make money in the UK, we must offer them a good price or they will do so elsewhere and we will all be left behind. (Sadly this doesn't apply to working and middle class people who can't choose the country they do the business in; if we don't like the price of our gas bill we're stuck with it, that's is why Osborne raised our VAT in January.) If more high earners can be tempted to the UK then the country really can make more money by lowering taxes. But does this all sound too good to be true?

This year is the 10th anniversary of something that has distinctively shaped American politics ever since. In 2001, Clinton left the White House with the US running at a surplus that it could only dream of having today. Months later, George Bush unveiled his tax cuts for the richest 1 per cent of Americans who were rebranded as "job creators". The idea was that more business would come to America and that the earners at the very top would reinvest what they would otherwise have paid in taxes on employing new workers, those new workers would then pay their taxes and spend more so both the government and the economy would be better off.

It all worked perfectly according the Republican Speaker of the United States House of Representatives, John Boenher, who, in May, said that the Bush tax cuts had "created about eight million jobs over the first 10 years that they were in existence". His claim was soon contested by an independent fact-checking website called They concluded that six million jobs had been created (not due to the tax cuts, but in total). While this contradicts Boehner's statement, it still appears to be a substantial growth until you remember that under Bill Clinton more than 22 million jobs were created over the same period of time. Even If Boehner believes that without the tax cuts not a single job would have been created in eight years, he still fails to mention that under George Bush the country had simultaneously lost out. Even before the crash in 2008, the jobs market had stagnated. According to the US Department of Labor when the tax cuts were enacted in June 2001, unemployment stood at 4.5 per cent, and, by the time of the crash, it was 6.2 per cent. Some of the "job creators" did reinvest the money from the tax cuts to employ people; the only problem was that they did it overseas and today unemployment in the USA sits at 9 per cent.

So jobs did badly, but how did the nation's budget do as a whole? Like many countries, America is currently deep in the red. Since the tax cut, the US's deficit has doubled and the country is facing widespread austerity measures. I'm not an economist, but the facts are that when Clinton raised taxes on high earners the deficit decreased and when Bush lowered those taxes, the deficit ballooned. The cuts were by no means the only factor, but evidence for their success is very hard to find.

While slashing taxes on the super-rich remains largely unpopular on both sides of the Atlantic, there will always be political weight behind them due to high earners like David Koch and Michael Ashcroft, who maintain influence by bankrolling political parties. They can change the minds of politicians and even sway the general public but the facts remain the same. While "coddling the super-rich" might have temporarily helped inflate economic bubbles, it carries no guarantees to raise money or employment.

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