Trickle-down economics

Trickle-down economics, also known as trickle-down theory or the horse and sparrow theory, is the economic proposition that taxes on businesses and the wealthy in society should be reduced as a means to stimulate business investment in the short term and benefit society at large in the long term. The same concept is embodied in the phrase “a rising tide lifts all boats.” In recent history, the term has been used by critics of supply-side economic policies, such as "Reaganomics". Whereas general supply-side theory favors lowering taxes overall, trickle-down theory more specifically advocates for a lower tax burden on the upper end of the economic spectrum.[1][2] Empirical evidence shows that the proposition has never managed to achieve all of its stated goals as described by the Reagan administration.[3][4][5][6]

Ronald Reagan's economic policies, dubbed "Reaganomics", included large tax cuts and were characterized as trickle-down economics. In this picture, he is outlining his plan for the Economic Recovery Tax Act of 1981 from the Oval Office in a televised address, July 1981

Major examples of Republicans supporting what critics call "trickle-down economics" include the Reagan tax cuts, the Bush tax cuts and the Tax Cuts and Jobs Act of 2017.[7] In each of the aforementioned tax reforms, taxes were cut across all income brackets, but the biggest reductions were given to the highest income earners,[8] although the Reagan era tax reforms also introduced the earned income tax credit which has received bipartisan praise for poverty reduction and is largely why the bottom half of workers pay no federal income tax.[9] Similarly, the Tax Cuts and Jobs Act of 2017 cut taxes across all income brackets, but especially favored the wealthy.[10]

The term "trickle-down" originated as a joke by humorist Will Rogers and today is often used to criticize economic policies that favor the wealthy or privileged while being framed as good for the average citizen. David Stockman, who as Ronald Reagan's budget director championed Reagan's tax cuts at first, later became critical of them and told journalist William Greider that "supply-side economics" is the trickle-down idea:[11][12]

It's kind of hard to sell 'trickle down,' so the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory.

— David Stockman, The Atlantic

Political opponents of the Reagan administration soon seized on this language in an effort to brand the administration as caring only about the wealthy.[citation needed] Some studies suggest a link between trickle-down economics and reduced growth, and some newspapers concluded that trickle-down economics does not promote jobs or growth, and that "policy makers shouldn't worry that raising taxes on the rich [...] will harm their economies".[4][13][3]

History and usageEdit

 
William Jennings Bryan, who criticized trickle-down theory in his Cross of Gold speech in 1896

In 1896, Democratic presidential candidate William Jennings Bryan described the concept using the metaphor of a "leak" in his Cross of Gold speech:[14][15]

There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.[16]

Humorist Will Rogers jokingly advised in a column in 1932:[17]

This election was lost four and six years ago, not this year. They [Republicans] didn't start thinking of the old common fellow till just as they started out on the election tour. The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover was an engineer. He knew that water trickles down. Put it uphill and let it go and it will reach the driest little spot. But he didn't know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellow's hands. They saved the big banks, but the little ones went up the flue.

William J. Bennett wrote:

Humorist Will Rogers referred to the theory that cutting taxes for higher earners and businesses was a "trickle-down" policy, a term that has stuck over the years.[18]

Presidential speechwriter Samuel Rosenman wrote:

The philosophy that had prevailed in Washington since 1921, that the object of government was to provide prosperity for those who lived and worked at the top of the economic pyramid, in the belief that prosperity would trickle down to the bottom of the heap and benefit all.

The Merriam-Webster Dictionary notes that the first known use of "trickle-down" as an adjective meaning "relating to or working on the principle of trickle-down theory" was in 1944[19] while the first known use of "trickle-down theory" was in 1954.[20]

After leaving the presidency, Democrat Lyndon B. Johnson alleged "Republicans [...] simply don't know how to manage the economy. They're so busy operating the trickle-down theory, giving the richest corporations the biggest break, that the whole thing goes to hell in a handbasket."[21]

Although "trickle-down" is commonly mentioned in reference to income, Arthur Okun has used it to refer to the flow of the benefits of innovation, which do not accrue entirely to the "great entrepreneurs and inventors," but trickle down to the masses.[22] More precisely, William Nordhaus, a winner of the Nobel Memorial Prize in Economic Sciences, estimates that innovators can capture only an extremely low 2.2 percent of the total surplus from innovation.[23] Circling back to income "trickle-down", the surplus from innovation can take the form of gains in real wages, which are spread throughout the economy, according to Nobel laureate economist Paul Romer.[24] In particular, economist William Baumol argues that "the bulk of the unprecedented and widespread rise in the developed world's living standards since the Industrial Revolution could not have occurred without the revolution's innovations."[25]

Speaking on the Senate floor in 1992, Senator Hank Brown (R-Colorado) said: "Mr. President, the trickle-down theory attributed to the Republican Party has never been articulated by President Reagan and has never been articulated by President Bush and has never been advocated by either one of them. One might argue whether trickle-down makes any sense or not. To attribute to people who have advocated the opposite in policies is not only inaccurate but poisons the debate on public issues."[26]

Economist Thomas Sowell consistently argues that trickle-down economics has never been advocated by any economist, writing in a 2014 column:

Let's do something completely unexpected: Let's stop and think. Why would anyone advocate that we "give" something to A in hopes that it would trickle down to B? Why in the world would any sane person not give it to B and cut out the middleman? But all this is moot, because there was no trickle-down theory about giving something to anybody in the first place. The "trickle-down" theory cannot be found in even the most voluminous scholarly studies of economic theories — including J.A. Schumpeter's monumental History of Economic Analysis, more than a thousand pages long and printed in very small type.

Sowell has also written extensively on trickle-down economics and opposes its characterization firmly, citing that supply-side economics has never claimed to work in a "trickle-down" fashion. Rather, the economic theory of reducing marginal tax rates works in precisely the opposite direction: "Workers are always paid first and then profits flow upward later – if at all."[27][28]

CriticismsEdit

In a study of "zombie ideas", political scientists Brainard Guy Peters and Maximilian Lennart Nagel describe trickle-down economics as the most enduring "zombie idea" in American politics. By zombie idea, they refer to ideas which have been unsuccessful at achieving intended goals, yet still survived in public policy discourse.[29]

EconomicsEdit

The economist John Kenneth Galbraith noted that "trickle-down economics" had been tried before in the United States in the 1890s under the name "horse-and-sparrow theory", writing:

Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: 'If you feed the horse enough oats, some will pass through to the road for the sparrows.'

Galbraith claimed that the horse-and-sparrow theory was partly to blame for the Panic of 1896.[30] While running against Ronald Reagan for the Presidential nomination in 1980, George H. W. Bush had derided the trickle-down approach as "voodoo economics".[31] In the 1992 presidential election, independent candidate Ross Perot also referred to trickle-down economics as "political voodoo".[32] In the same election during a presidential town hall debate, Bill Clinton said:

What I want you to understand is the national debt is not the only cause of [declining economic conditions in America]. It is because America has not invested in its people. It is because we have not grown. It is because we've had 12 years of trickle-down economics. We've gone from first to twelfth in the world in wages. We've had four years where we’ve produced no private-sector jobs. Most people are working harder for less money than they were making 10 years ago.[33]

Overall, there is ample empirical support for and against tax cuts as means of spurring economic growth. In a 2012 study in the National Tax Journal, Canadian economist Bev Dahlby & Ergete Ferede found that "a higher provincial statutory corporate income tax rate is associated with lower private investment and slower economic growth. Our empirical estimates suggest that a 1 percentage point cut in the corporate tax rate is related to a 0.1-0.2 percentage point increase in the annual growth rate."[34]

Analysis published in 2012 by the Congressional Research Service found that reductions in top tax rates were not correlated with economic growth but were associated with income inequality. The CRS later withdrew the analysis after Senate Republicans objected to its findings and wording.[35][36]

A 2012 study by the Tax Justice Network indicates that wealth of the super-rich does not trickle down to improve the economy, but it instead tends to be amassed and sheltered in tax havens with a negative effect on the tax bases of the home economy.[37]

A 2015 paper by researchers for the International Monetary Fund argues that there is no trickle-down effect as the rich get richer:

[I]f the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth.[4]

A 2015 report on policy by economist Pavlina R. Tcherneva described the failings of increasing economic gains of the rich without commensurate participation by the working and middle classes, referring to the problematic policies as "Reagan-style trickle-down economics," and "a trickle-down, financial-sector-driven policy regime."[38]

In 2016, Nobel laureate Joseph Stiglitz wrote that the post-World War II evidence does not support trickle-down economics, but rather "trickle-up economics" whereby more money in the pockets of the poor or the middle benefits everyone.[39]

A 2017 IMF paper found that " (i) Personal income tax (PIT) cuts stimulate growth but the supply side effects are never large enough to offset the revenue loss from lower marginal tax rates; (ii) PIT cuts do “trickle-down” the income distribution: tax cuts stimulate demand for non-tradable services which raise the wages and employment prospects of low-skilled workers even if the tax cut is not directly incident on them; (iii) A revenue neutral tax plan that reduces PIT for middle-income groups, raises the consumption tax, and expands the Earned Income Tax Credit can have modestly positive effects on growth while reducing income polarization; (iv) The growth effects from lower income taxes are concentrated in non-tradable service sectors although the increased demand for tradable goods generate positive spillovers to other countries; (v) Tax cuts targeted to higher income groups have a stronger growth impact than tax cuts for middle income households".[40]

A 2020 study by economist Anil Kumar of the Federal Reserve Bank of Dallas found that "The Tax Cuts and Jobs Act (TCJA) of 2017 is the most extensive overhaul of the U.S. income tax code since the Tax Reform Act of 1986. Existing estimates of TCJA’s economic impact are based on economic projections using pre-TCJA estimates of tax effects. Following recent pioneering work of Zidar (2019), I exploit plausibly exogenous state-level variation in tax changes and find that an income tax cut equaling 1 percent of GDP led to a 1 percentage point higher nominal GDP growth and about 0.3 percentage point faster job growth in 2018."[41]

A 2019 study in the Journal of Political Economy found contrary to the claims of trickle-down theory that "the positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups and that the effect of tax cuts for the top 10 percent on employment growth is small."[5]

A 2020 working paper by London School of Economics and Political Science researchers compared the results of countries that passed tax cuts in a specific year with those that did not, over a five decade period from 1965 to 2015 in the 18 member countries of the Organisation for Economic Co-operation and Development. It found that contrary to the claims of trickle-down theory, tax cuts for the rich had no "significant effect on employment or economic growth". They found no evidence that the cuts induced "labour supply responses" from high-income individuals (i.e. "lead to more hours of work, more effort, etc.") that boosted economic activity. They did find evidence of a "sizable" increase in income inequality. "Major tax cuts for the rich increase the top 1% share of pre-tax national income in the years following the reform. The magnitude of the effect is sizeable; on average, each major reform leads to a rise in top 1% share of pre-tax national income of 0.8 percentage points."[6]

PoliticsEdit

In 2013, Pope Francis referred to "trickle-down theories" in his apostolic exhortation Evangelii Gaudium with the following statement (No. 54):

Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.[42]

In New Zealand, Labour Party Member of Parliament Damien O'Connor has called trickle-down economics "the rich pissing on the poor" in the Labour Party campaign launch video for the 2011 general election.[43] In a 2016 presidential candidates debate, Hillary Clinton accused Donald Trump of supporting the "most extreme" version of trickle-down economics with his tax plan, calling it "trumped-up trickle-down" as a pun on his name.[44] In his speech to a joint session of Congress on April 28, 2021, US President Joe Biden stated that "trickle-down economics has never worked."[45]

See alsoEdit

ReferencesEdit

  1. ^ Amadeo, Kimberly (April 29, 2017). "Why Trickle Down Economic Works in Theory But Not in Fact". The Balance.
  2. ^ Crouse, Eric R. (2013). The Cross and Reaganomics: Conservative Christians Defending Ronald Reagan. Rowman & Littlefield. p. 31. ISBN 9780739182222.
  3. ^ a b Craig Stirling (December 16, 2020). "Fifty Years of Tax Cuts for Rich Didn't Trickle Down, Study Says". Bloomberg News.
  4. ^ a b c Era Dabla-Norris; Kalpana Kochhar; Nujin Suphaphiphat; Frantisek Ricka; Evridiki Tsounta (June 15, 2015). Causes and Consequences of Income Inequality: A Global Perspective. International Monetary Fund. Retrieved June 25, 2015.
  5. ^ a b Zidar, Owen (October 30, 2018). "Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment" (PDF). Journal of Political Economy. 127 (3): 1437–1472. doi:10.1086/701424. ISSN 0022-3808. S2CID 158844554. Archived (PDF) from the original on June 2, 2018. Retrieved December 4, 2019.
  6. ^ a b Hope, David; Limberg, Julian (December 2020). "The Economic Consequences of Major Tax Cuts for the Rich" (PDF). International Inequalities Institute. London School of Economics and Political Science. Archived (PDF) from the original on December 27, 2020. Retrieved December 18, 2020. Cite journal requires |journal= (help)
  7. ^ "Trickle-down economics gets new life as Republicans push tax-cut plan".
  8. ^ "Reaganomics", Corporate Finance Institute. Retrieved May 16, 2021.
  9. ^ Marr, Chuck (August 1, 2014). "Reagan’s Actions Made Him a True EITC Champion". Center on Budget and Policy Priorities. Retrieved May 16, 2021.
  10. ^ Casselman, Ben and Jim Tankersley (April 14, 2019). "Face It: You (Probably) Got a Tax Cut". The New York Times. Retrieved May 16, 2021.
  11. ^ "The Education of David Stockman" Archived December 27, 2020, at the Wayback Machine by William Greider
  12. ^ William Greider. The Education of David Stockman. ISBN 0-525-48010-2.
  13. ^ "In the Real World of Work and Wages, Trickle-Down Theories Don't Hold Up". The New York Times. April 12, 2007. Archived from the original on November 12, 2020. Retrieved February 23, 2017.
  14. ^ Wilson, Thomas Frederick. 1992. The Power "to Coin" Money: The Exercise of Monetary Powers by the Congress. Armonk, N.Y.: M.E. Sharpe. p. 172. ISBN 0873327942
  15. ^ Baker, Andrew, David Hudson, and Richard Woodward. 2005. Governing Financial Globalization: International Political Economy and Multi-Level Governance. London; New York: Routledge. p. 26. ISBN 9780203479278.
  16. ^ Bryan's "Cross of Gold" Speech: Mesmerizing the Masses Archived September 27, 2011, at the Wayback Machine, historymatters.com
  17. ^ "Will Rogers on 'trickle up' economics". WiredPen. January 30, 2015. Archived from the original on May 10, 2017. Retrieved March 11, 2017.
  18. ^ Bennett, William J. (2007). America: The Last Best Hope. Harper Collins. p. 78. ISBN 1595551115.
  19. ^ Merriam-Webster Dictionary (online edition) entry for "trickle-down". Archived April 10, 2010, at the Wayback Machine Accessed September 17, 2010.
  20. ^ Merriam-Webster Dictionary (online edition) entry for "trickle-down theory". Archived April 10, 2010, at the Wayback Machine Accessed September 17, 2010.
  21. ^ Janos, Leo (July 1973). "The Last Days of the President". The Atlantic. Archived from the original on July 1, 2013. Retrieved March 12, 2017.
  22. ^ Okun, Arthur M. (1975). Equality and Efficiency, the Big Tradeoff. Brookings Institution. pp. 46–47. ISBN 9780815764762.
  23. ^ Nordhaus, William D. (April 2004). "Schumpeterian Profits in the American Economy: Theory and Measurement". National Bureau of Economic Research. doi:10.3386/w10433. S2CID 154943478. Archived from the original on December 27, 2020. Retrieved October 2, 2019. Cite journal requires |journal= (help)
  24. ^ Romer, Paul (February 1, 1994). "New goods, old theory, and the welfare costs of trade restrictions" (PDF). Journal of Development Economics. 43 (1): 5–38. doi:10.1016/0304-3878(94)90021-3. ISSN 0304-3878. S2CID 28772407.
  25. ^ Baumol, William J. (July 1, 2010). The Microtheory of Innovative Entrepreneurship. Princeton University Press. p. 80. ISBN 9781400835225. Archived from the original on December 27, 2020. Retrieved September 17, 2020.
  26. ^ Hank Brown. Congressional Record, March 24, 1992.
  27. ^ "The 'Trickle-Down' Lie, by Dr. Thomas Sowell". January 7, 2014. Archived from the original on December 27, 2020. Retrieved December 1, 2020.
  28. ^ "'Trickle Down' Theory and 'Tax Cuts for the Rich'". Archived September 24, 2012, at WebCite.
  29. ^ Peters, Brainard Guy; Nagel, Maximilian Lennart (2020). Zombie Ideas: Why Failed Policy Ideas Persist. Cambridge University Press. p. 8. doi:10.1017/9781108921312. ISBN 9781108921312. Archived from the original on December 27, 2020. Retrieved November 28, 2020.
  30. ^ Galbraith, John Kenneth (February 4, 1982) "Recession Economics Archived December 27, 2020, at the Wayback Machine." New York Review of Books Volume 29, Number 1.
  31. ^ "Reagonomics or 'voodoo economics'?". BBC News. June 5, 2004. Archived from the original on August 29, 2017. Retrieved January 4, 2012.
  32. ^ "The Living Room Candidate - Commercials - 1992 - Trickle Down". www.livingroomcandidate.org. Archived from the original on December 27, 2020. Retrieved March 13, 2017.
  33. ^ "Bill Clinton Won 1992 Town Hall Debate By Engaging With One Voter". Huffington Post. October 16, 2012. Archived from the original on December 27, 2020. Retrieved March 16, 2017.
  34. ^ Ferede, Ergete; Dahlby, Bev (2012). "The Impact of Tax Cuts on Economic Growth: Evidence from the Canadian Provinces". National Tax Journal. 65 (3): 563–594. doi:10.17310/ntj.2012.3.03. S2CID 18653835.
  35. ^ Hughes, Siobhan (September 14, 2012). "Report: Tax Cuts for Wealthy Linked to Income Inequality". The Wall Street Journal.
  36. ^ Weisman, Jonathan (November 1, 2012). "Nonpartisan Tax Report Withdrawn After G.O.P. Protest". The New York Times.
  37. ^ Heather Stewart (July 21, 2012). "Wealth doesn't trickle down – it just floods offshore, research reveals". The Guardian. London. Retrieved August 6, 2012.
  38. ^ Tcherneva, Pavlina (March 2015). "When a Rising Tide Sinks Most Boats: Trends in US Income Inequality" (PDF). Levy Economics Institute. Bard College. Archived (PDF) from the original on April 3, 2015. Retrieved November 25, 2016.
  39. ^ Stiglitz, Joseph E. (2016). "Inequality and Economic Growth". Rethinking Capitalism. Wiley-Blackwell: 134–155. doi:10.7916/d8-gjpw-1v31.
  40. ^ Macroeconomic and Distributional Effects of Personal Income Tax Reforms. imf.org. Retrieved May 16, 2021.
  41. ^ Kumar, Anil (May 4, 2020). "Did Tax Cuts and Jobs Act Create Jobs and Stimulate Growth? Early Evidence Using State-Level Variation in Tax Changes". ssrn.com. Retrieved May 16, 2021.
  42. ^ "Evangelii Gaudium : Apostolic Exhortation on the Proclamation of the Gospel in Today's World". vatican.va. Archived from the original on August 11, 2015. Retrieved December 9, 2019.
  43. ^ Chapman, Kate (October 28, 2011). "Labour campaign video harks back to history". Stuff.co.nz. Retrieved October 5, 2016.
  44. ^ Jacob Pramuk (September 26, 2016). "Clinton: Trump would cut taxes for the rich in 'trumped up' trickle down economics". CNBC. Archived from the original on December 27, 2020. Retrieved September 17, 2017.
  45. ^ "Biden: 'Trickle-down economics has never worked'". April 28, 2021.
  • Mkilema, F. (2018). Trickle down economics Vs. Middle-out economics

Further readingEdit

External linksEdit