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Trickle-down economics

"Trickle-down economics" and "trickle-down theory," is the economic-political argument that the increases in the earnings of the rich are good for the poor because some of those additional earnings will benefit the middle class and the poor through increased spending, investment, and job creation. The term has a derogatory connotation and is normally used in scholarly literature, both in works of advocacy and criticism.

The theory states that if the top income earners invest more into the business infrastructure and equity markets, it will in turn lead to more goods at lower prices, and create more jobs for middle and lower class individuals. This sentiment is captured in John F. Kennedy's argument, "a rising tide floats all boats." Proponents argue economic growth flows down from the top to the bottom, indirectly benefiting those who do not directly benefit from the policy changes. However, others have argued that "trickle-down" policies generally do not work, and that the trickle-down effect might be very slim.

Today "trickle-down economics" is most closely identified with the economic policies known as Reaganomics or supply-side economics. Originally, there was a great deal of support for tax reform; there was a dual problem that loopholes and tax shelters create a bureaucracy (private sector and public sector) and that relevant taxes are thus evaded. Reagan repeatedly cut taxes overall by modest amounts, but dramatically de-progressivized the income tax system, cutting the marginal tax rates on the highest-income tax bracket of joint-filed couples from 70% to 28%. However, Reagan's tax cuts actually made the tax code more progressive, not less, because in 1980, the richest 1% paid 19.05% of all federal income taxes, but by 1988, their share had increased to 27.58%.

When Bill Clinton proposed cutting taxes in order to spur business in 1997, it was predicted that the richest 1% would get 2.6% of the tax cut, and the poorest 20% would get 1.2% of it.

However, a better example of trickle-down would be the presidency of George W. Bush lowering taxes. In 2007, The New York Times said, "Though tax cuts for the rich were bigger than those for other groups, the wealthiest families paid a bigger share of total taxes. In 2004, CBS News said, "The tax rate declined across all income levels." In 2001, the richest 1% paid 33.89% of all federal income taxes, and by 2006, their share had increased to 39.89%. In June 2005 the Wall St. Journal wrote, "Earlier this month the Congressional Budget Office released its latest report on tax revenue collections... Federal tax revenues surged in the first eight months of this fiscal year by $187 billion. This represents a 15.4% rise in federal tax receipts over 2004. Individual and corporate income tax receipts have exploded like a cap let off a geyser, up 30% in the two years since the tax cut. Once again, tax rate cuts have created a virtuous chain reaction of higher economic growth, more jobs, higher corporate profits, and finally more tax receipts."

A major feature of these policies was the reduction of tax rates on capital gains, corporate income, and higher individual incomes, along with the reduction or elimination of various excise taxes. David Stockman, who as Reagan's budget director championed these cuts but then became skeptical of them, told journalist William Greider that the term "supply-side economics" was used to promote a trickle-down idea.

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, Ronald Reagan's budget director

The term "trickle-down" comes from an analogy with a phenomenon in marketing, the trickle-down effect.

Proponents' views

Stockman placed supply-side economics in a long tradition in economics, and maintained that laissez-faire will benefit not just those well-placed in the market but also the poorest. A more general version argues that increases in real gross domestic product are almost always good for the poor.

Economist Thomas Sowell has written that the actual path of money in a private enterprise economy is quite the opposite of that claimed by people who refer to the trickle-down theory. He noted that money invested in new business ventures is first paid out to employees, suppliers, and contractors. Only some time later, if the business is profitable, does money return to the business owners.

In the early 1990s Congressional Record, non-pejorative uses of the term are rare but do appear.

A May 16, 2006 editorial in the Wall St. Journal stated, "The Pacific Research Institute has crunched the tax numbers in all 50 states and published the 'U.S. Economic Freedom Index' ranking all states according to how friendly or unfriendly their policies were toward free enterprise... In 2005, per capita personal income grew 31% faster in the 15 most economically free states than it did in the 15 states at the bottom of the list. And employment growth was a staggering 216% higher in the most free states."

Criticisms

The ideas derided as "trickle-down economics" are often seen as a major rhetorical variant of "what's good for business and the rich is good for the country." In this form they have been ridiculed by Franklin Delano Roosevelt as "toryism." 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." He wrote, "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.

Proponents of Keynesian economics and related theories often criticize tax cuts for being "trickle down"; however, Keynesian theory actually holds that tax cuts can be used as an economic stimulus. Keynesians generally argue for broad fiscal policies that are direct across the entire economy, not towards one specific group. Supply-siders, on the other hand, argue that tax cuts for the rich promotes investment, which in turn promotes growth. It is this sort of targeted tax cut that is derided as trickle down since many in the economy do not directly reap benefits from the cut, and many may not see any benefit at all unless the cuts "trickle down" to them.

Criticism of term

Speaking on the Senate floor in 1992, Sen. Hank Brown 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. I do not think it does. To attribute to people who have advocated the opposite in policies is not only inaccurate but poisons the debate on public issues.

Thomas Sowell claimed that, despite its political prominence, no trickle-down theory has ever existed among economists. In response, many critics referred him to Stockman's remarks to Greider. Sowell replied in his newspaper columns. Stockman himself had not proposed or advocated the alleged theory so Sowell rejected him as an example of someone who had done so. Additionally, Stockman had not specifically named anyone who, or quoted a source that, advocated the theory although he did claim that the theory was being adhered to by the Reagan administration. Sowell replied that Stockman "was not even among the first thousand people to make that claim" but that "not one of those who made the claim could provide a single quote from anybody who had advocated a 'trickle-down theory.'"