Business/Finance

Does trickle-down economics work?

WRITTEN BY
03/14/22
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Fact Box

  • Economics is the “description and analysis of the production, distribution, and consumption of goods and services.” The definition of the ‘trickle-down theory’ says the “financial benefits given to big business will in turn pass down to smaller businesses and consumers.”
  • Scottish Enlightenment thinker, Adam Smith, used the metaphor of the invisible hand to explain the unseen forces that move the free market economy. This concept argues that individual self-interest paired with the freedom to produce and consume goods leads to societal flourishing. 
  • President Ronald Reagan (1981-1989) promoted ‘trickle-down economics’ in his policies, coined ‘Reaganomics.’ His policies, implemented in response to the prolonged period of economic stagflation occurring under President Gerald Ford in 1976, produced “widespread tax cuts, decreased social spending, increased military spending, and the deregulation of domestic markets.”
  • A 2021 Ipsos/Reuters poll found that 4 in 10 Republicans agreed with the statement “trickle-down economics have never worked in America,” while 7 in 10 of Democrats agreed. Policies promoting tax cuts for the wealthy to encourage investment, hiring and economic growth had been a mark of Republican party since Reagan’s presidency.

Martin Le (No)

According to the trickle-down economic theory, benefits enjoyed by the rich flow to all the economy members. The theory assumes that savers, company owners, and investors run the economic growth. But, this concept of how the rich's tax and income benefits 'trickle-down' to the lower class does not work in reality.

Firstly, top tax rate reduction does not translate to economic growth. Realistically, cutting taxes for the wealthy should lead to economic growth, benefitting the lower-income earners in the economy, which is often not the case. If the rich could invest the money gained from tax reduction, the economy would grow. Instead, they hoard the money while living below their standards, taking it out of circulation; essentially, no economic growth.

Likewise, cutting down top tax rates does not lead to growth in income for everyone. Reducing taxes for the rich leaves a good percentile with substantial money to invest and access to money-growing institutions to increase their wealth. However, many people who do not have extra wealth and lack opportunities for investments might let what little they do have idle in banks, leading to income inequality between the rich and the lower class.

Additionally, tax reduction for the rich does not increase wages. Wealthy business people should use the tax cuts to expand their firms and increase wages and salaries. Instead, they often hoard the money and grow their businesses through worker exploitation.

Finally, top tax reduction does not increase employment. The point of cutting top taxes is to help investors expand their businesses and hire more workers. However, this is rarely the case; the 50 years of data economists have collected and graphed show it all.


Siam (Yes)

People who do not understand trickle-down economics continue to claim it does not work, but the reality is that it works quite well even today. The key to understanding trickle-down economics is that it was designed to give tax breaks to the rich, who would then use the extra money for investment or growth creation. It was never meant to provide tax breaks to middle or working-class Americans. With that in mind, the classic cases reflecting the success of trickle-down economics working very well are Amazon and Walmart. These mega-corporations receive huge tax breaks, but in return, create thousands of jobs, boost other businesses in the area, and they invest heavily in the communities by providing scholarships and training for young people. And with thousands of job creations, the local and state governments enrich their coffers by collecting more tax. Another example of the success of the trickle-down theory is Reaganomics. In the 1980s, it helped the US overcome the recession. Reagan reduced the corporate tax from 46% to 40%, and in turn, the wealthy started to create more jobs, which led to a drop in unemployment. 

Similarly, In 2001, President GW Bush used trickle-down policies to counter the recession with his Economic Growth and Tax Relief Reconciliation Act by reducing income taxes for the wealthy, which led to the end of the recession in November 2001.

In late 2017, Trump signed the Tax Cuts and Jobs Act (TCJA) which reduced corporate tax from 35% down to 21%, resulting in low unemployment and an improved economy due to the growth spurt. When larger companies and the wealthy are able to keep more of their earnings to invest more freely in their business, other businesses, and create more jobs, it benefits everyone in society as it produces more opportunities and output for everyone involved.

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