Conservative politicians are pursuing a discredited economic policy of tax reductions for the richest individuals and businesses. But they are also claiming that they will reinvest in public services, having cut £40 billion between 2010 and 2019 as part of their austerity programme. So, how does that work? Where will they get the money from, assuming that their public spending pledges are genuine?
Prime Minister Boris Johnson tells us to believe in the philosophy of the 14th century Tunisian proto-economist, Ibn Khaldun. But not only has Boris Johnson misrepresented what Khaldun said about tax cuts, he appears to have cribbed the reference (unintentionally, I’m sure) from the former US President, Ronald Reagan, whose economic team also championed tax cuts for the rich.
Boris and the great sage
On 17th July at around 45 minutes into the final Tory leadership hustings that eventually made him PM, the sixth or so question from the audience to Boris Johnson was: “you have pledged a programme of increased public spending and cutting taxes. How will you pay for this without increasing the deficit?” Johnson replied: “Because it was the great Tunisian sage, Ibn Khaldun in the 14th century, who pointed out that there are some taxes that you can cut that actually stimulate economic growth.” The audience, comprised of Tory grassroots members, was happy to hear this news and applauded generously.
Johnson continued: “I think Ibn Khaldun observed that when it came to… I think it was the date harvest, or olives, or something, in 14th century Tunisia, I can’t remember exactly what it was, but they cut the tax on, on, on, on–which was, which was too high–and the farmers grew more dates, or olives, and the tax yield went up accordingly. Whenever corporation tax is cut it yields more money.”
Johnson repeated this claim to Sky’s Sophy Ridge in an interview. A somewhat bemused-looking Ridge later tweeted: “When asked about his spending plans and plans to cut taxes, Boris Johnson responds ‘as the great Tunisian scholar and sage Ibn Khaldun pointed out …, there are plenty of taxes that you can cut which will actually increase your revenues’.”
Reagan got there first
US President Ronald Reagan’s economists were also fans of tax cuts for the richest. Reagan came to power in January 1981 and left office in January 1989. His economists pioneered a tax-cutting, budget-cutting, deregulating policy known as “Reaganomics.” Britain adopted similar policies during the 1980s as part of “Thatcherism,” named after the eponymous PM.
The ideology incorporates “supply-side” theory, which posits that consumer spending will increase following reductions in prices that flow from lower business taxes. This is related to “trickle-down” theory, which says that tax cuts for the rich will mean shared wealth following their increased spending and investment. However, as the liquidity firm Citigroup explained in its infamous investor memo on “plutonomies,” all this system does is create a luxury goods market of apartments, jewellery, packaged holidays, and the like. Reagan’s Economic Recovery Tax Act 1981 cut personal taxes by around 25 percent. But it also led to trade and budget deficits.
Like Boris Johnson nearly forty years later, Reagan’s speechwriters sought to justify this policy by citing Ibn Khaldun. During an October 1981 press conference, Reagan said: “in the beginning of the dynasty, great tax revenues were gained from small assessments.” He added that “at the end of the dynasty, small tax revenues were gained from large assessments.”
And misrepresented Khaldun
But economists picked up on Reagan’s misrepresentation at the time. K.V. Nagarajan noted that Reagan’s “paraphrase is of dubious ancestry, and his interpretation of Ibn Khaldun is unfounded.” Supply-side theory on which Reagan’s model was based includes “a set of propositions” that depart from Khaldun’s observations.
More recently, Khaldun’s biographer, Robert Irwin (2018, Princeton University Press) noted that
“Khaldun has been presented as a precursor of such economic thinkers as Marx, Engels, and Pareto,” which is ironic given, that the first two economists are ideological opponents of Johnson’s Conservatism. Irwin also notes Reagan’s citation, but adds: “In its early years a regime fixes taxes at a low rate but nevertheless takes in large revenues. But, as the regime decays, it sets high rates of taxation but takes in diminishing amounts of revenue.”
He concludes that “Reagan (or his speech writers) had misread Ibn Khaldun.” And so, too, did Boris Johnson; assuming that he even read Khaldun. Irwin concludes that “Khaldun’s … model placed greater weight on the political and moral decline of the dynasty. He did not think that high taxes were the main cause of reduced revenue, rather that high taxes were a consequence of increased expenditure and reduced income.”
So much for trickle-down economics
So, where did Johnson hear about Ibn Khaldun? To promote his book, Irwin was interviewed by the Spectator, a publication once edited by Johnson. So it is plausible that Johnson learned about Khaldun, or at least was reminded of him, as a result of the Spectator’s coverage. But in addition to Reagan, the name of the great proto-economist creeps up in “free market” economic circles more generally. Consider the pro-privatisation Adam Smith Institute’s article singing the praises of Khaldun, following Johnson’s reference. “Quoting Ibn Khaldun isn’t pretentiousness it’s recording both the intellectual history of the concept plus its obviousness.”
These and other think tanks can conjure all manner of elaborate graphs and theories, but the fact is that after a decade of austerity–which already included tax cuts for the highest earners–child poverty has increased, food bank reliance is at record highs, and figures on homeless continue to climb. So much for trickle-down economics.