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17 March 2021

Expansion of knowledge economy has led to decrease in taxes on rich

Increasing levels of employment in the knowledge economy in developed countries has led to a decrease in taxes on the rich, a new study has found.

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The expansion of the knowledge economy has put downward pressure on taxation for the rich.

Data gathered from across 13 countries over almost half-a-century by academics from King’s College London showed that the expansion of the knowledge economy – including sectors like finance, business services, and technology – has been strongly associated with lower taxes on the rich.

The findings were revealed in a new paper by Dr Julian Limberg and Dr David Hope, The Knowledge Economy and Taxes on the Rich, accepted for publication in the Journal of European Public Policy.

In it, the academics “utilise an innovative statistical approach—Bayesian latent variable analysis—to construct a new, comprehensive measure of taxes on the rich” that covers 13 developed countries from 1970 – 2015.

They then use panel data models to estimate the effect of the rise of the knowledge economy on taxes on the rich and find that “an increase in knowledge-intensive employment by two standard deviations (nine percentage points) leads to a decrease in the indicator on taxing the rich by almost 1.5 standard deviations (0.4 points).”

The analysis “therefore provides a powerful, yet often overlooked, explanation for the remarkable reduction in tax progressivity that has taken place across the advanced democracies in the past 50 years.”

The transition to the knowledge economy has been driven by the revolution in information and communications technologies, and characterised by the shift of economic activity out of manufacturing and into services, the rise of mass systems of higher education, greater female labour force participation, and the weakening of labour market institutions.

Studies that have looked at the relationship between the knowledge economy and taxation point to two mechanisms that may be driving the results of Hope and Limberg’s analysis: the growing lobbying and political power of businesses in knowledge-intensive industries; and the lower support for redistribution among those employed in higher-skilled, higher-earning jobs within the knowledge economy.

You can read the full paper here.

In this story

David  Hope

Senior Lecturer in Political Economy

Julian Limberg

Senior Lecturer in Public Policy