The Economic Consequences of Major Tax Cuts for the Rich, LSE International Inequality Institute Working Paper 55

By David Hope and Julian Limberg

This paper uses data from 18 OECD countries over the last five decades to estimate the causal effect of major tax cuts for the rich on income inequality, economic growth, and un- employment. First, we use a new encompassing measure of taxes on the rich to identify in- stances of major reductions in tax progressivity. Then, we look at the causal effect of these episodes on economic outcomes by applying a nonparametric generalization of the differ- ence-in-differences indicator that implements Mahalanobis matching in panel data analysis. We find that major reforms reducing taxes on the rich lead to higher income inequality as measured by the top 1% share of pre-tax national income. The effect remains stable in the medium term. In contrast, such reforms do not have any significant effect on economic growth and unemployment.

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