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Shock horror, trickle down does not work

Written By: - Date published: 7:31 am, December 18th, 2020 - 54 comments
Categories: capitalism, class war, Economy, tax, us politics - Tags:

Well I never.

Can you remember how over the past five decades we kept being told that giving tax cuts to the most wealthy would make us all better off?  How the wealth would just trickle down?

And remember how some lefty extremists said it was a load of crap and was not true but were attacked as being lefty extremists and engaging in the politics of envy?

Well there is yet another academic study from the London School of Economics suggesting that giving lots of money to the wealthiest in the hope that we will all be better off is not a good idea.

From the LSE summary of the paper:

Major reforms reducing taxes on the rich lead to higher income inequality but do not have any significant effect on economic growth or unemployment, according to new research by LSE and King’s College London.

Researchers say governments seeking to restore public finances following the COVID-19 crisis should therefore not be concerned about the economic consequences of higher taxes on the rich.

The paper, published by LSE’s International Inequalities Institute, uses data from 18 OECD countries, including the UK and the US, over the last five decades. The Economic Consequences of Major Tax Cuts for the Rich, by David Hope and Julian Limberg, shows that the last 50 years were a period of falling taxes on the rich in the advanced economies. Major tax cuts were spread across countries and throughout the observation period but were particularly clustered in the late 1980s.

It states: “Our results show that…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. The results also show that economic performance, as measured by real GDP per capita and the unemployment rate, is not significantly affected by major tax cuts for the rich. The estimated effects for these variables are statistically indistinguishable from zero.”

It continues: “Our findings on the effects of growth and unemployment provide evidence against supply side theories that suggest lower taxes on the rich will induce labour supply responses from high-income individuals (more hours of work, more effort etc.) that boost economic activity. They are, in fact, more in line with recent empirical research showing that income tax holidays and windfall gains do not lead individuals to significantly alter the amount they work.”

The authors conclude: “Our results have important implications for current debates around the economic consequences of taxing the rich, as they provide causal evidence that supports the growing pool of evidence from correlational studies that cutting taxes on the rich increases top income shares, but has little effect on economic performance.”

Short version? Trickle down does not work.  The authors of Rogernomics and Euthenasia, and John Key and his band of merry men should hang their heads in shame.

Here is something I wrote a year ago that I will repeat without quote marks. The post was about Donald Trump’s tax cuts for the wealthy.

The theory of trickle down dates back to Milton Friedman and the Chicago School of Economics.  Relying on work by economist Arthur Laffer and the infamous Laffer Curve they argued that a reduction, any reduction in tax would improve overall economic performance.  Their analysis was simplistic, because clearly for the theory to work it was important that if public spending was decreased the replacement private spending allowed by the associated tax cut also be for a public good.  Private jets and French wine do not improve the plight of an ordinary person.

Supporters of the theory claim that Regan’s massive tax cuts in the 1980s helped pull America out of recession.  What was much more likely was a tripling of public debt from $712 billion in 1980 to $2.052 trillion in 1988 provided the stimulus.  Even with this large increase public debt was a relatively modest 41% of GDP in 1988.

And it has directly contributed to an increasing gap between the top 1% and the rest of us.

Kimberly Amadeo at The Balance offers this conclusion:

The trickle-down theory postulates that the benefits from tax cuts, capital gains, dividends, and even looser regulations on corporations and wealthy individuals would eventually flow down to benefit middle- to low- income earners. The extra wealth accruing from the deductions would drive the wealthy to invest in or expand businesses, boosting economic growth.

The Laffer Curve supports its effect but only up to the point where the tax rates are at a prohibitive range. Out of this range, trickle-down is deemed infeasible.

Trickle-down economics generally does not work because:

  • Cutting taxes for the wealthy often do not translate to increased rates of employment, consumer spending, and government revenues in the long-term.
  • Instead, cutting taxes for middle-and lower-income earners will drive the economy through the trickle-up phenomenon.
  • The added income for the wealthy, resulting from tax cuts, will simply increase the growing income inequality in the United States.

President Trump’s Tax Cuts and Jobs Act is of current concern because this trickle-down policy is seen to exacerbate the income inequality already kicked into overdrive by Reaganomics.

And Thomas Pitketty’s book Capital in the twenty first century is a withering deconstruction of the theory of trickle down. From the Guardian:

The gist of Piketty’s book is simple. Returns to capital are rising faster than economies are growing. The wealthy are getting wealthier while everybody else is struggling. Inequality will widen to the point where it becomes unsustainable – both politically and economically – unless action is taken to redistribute income and wealth. Piketty favours a graduated wealth tax and 80% income tax for those on the highest salaries.

Lord (Adair) Turner, the former chairman of the Financial Services Authority, says Capital is “a remarkable piece of work”. Turner, who has name-checked Piketty in his recent lectures, added: “He is saying that we have a set of tendencies at work to which the offset has to be a degree of redistribution. I completely agree with him.”

Krugman, writing in the New York Review of Books, says Piketty’s work will “change both the way we think about society and the way we do economics”.

The book has also created waves on the right. Allister Heath, writing in the Daily Telegraph, said the book was flawed but admitted that supporters of capitalism were being “slaughtered on the intellectual battlefield” and needed to get their act together fast.

The problem for Heath is that Piketty’s book seems to explain the brutal world of the Great Recession and its aftermath rather better than trickle-down economics. Capital speaks to the Occupy movement; it speaks to the under-25s in Britain whose real wages are 15% lower than at the end of the 1990s; it speaks to Generation Rent.

Trickle down is a fancy sounding theory justifying continued greed by the wealthy for even more. The sooner its complete lack of a rational let alone moral underpinning is exposed and acknowledged the better.

Maybe it is time for trickle up to be a thing?  The Covid response and the current robust state of New Zealand’s economy suggests that giving ordinary people sufficient to live on can have a beneficial effect.  For us all.

 

54 comments on “Shock horror, trickle down does not work ”

  1. “Maybe it is time for ‘trickle up’ to be a thing?”

    Don’t hold your breath!

    Look at the Labour members of parliament – the vast majority are members of the PMC [Professional Management Class] whose vested interests preclude them from any meaningful and structural reform. Lawyers and teachers, health professionals and accountants – any hint of working class backgrounds there?

    About the best that can be said of this Labour government is that it is not as bad as National was/would be. And for anyone hoping for radical change, that is a damning indictment!

    Jacinda has been described as Tony Blair in heels. I despair for this country.

    • Cricklewood 1.1

      From an economic standpoint Grant an Jacinda are about as left as Bill English.

    • satty 1.2

      PMC produces rather excellent professional audio equipment. So I prefer EMMC, the Entitled Middle Management Class: In a position to come up with rules and never stick to rules themselves and hardly enforce any of those rules, as it would probably hit a fellow EMMC.

      So there won't be any proper working solutions on:

      • Poverty
      • Environment / climate change
      • Car traffic

      ACT, National and Labour are full of EMMC, as you described, and even the Greens are not immune in my opinion.

      Best example: One would think having "Climate Emergency" announced on national, regional and local government level (at least here in Wellington), clear measurable reduction of unnecessary car travel and associated pollution would be one of the top short-term priorities. Or simply starting enforcing NZ Road Rules.

      Back to trickle down…

      Growing up in the "Soziale Marktwirtschaft" (social market economy) in Germany, where a family of 5 could live on one income, build and pay off a high quality home (still in top condition after 50 years!), go on holidays, enjoy free health system, all kids through university for free…, most of the modern western world looks like a completely idiotic system favouring just a handful of people at top (thanks to Neoliberalism) and neglect / exploit the majority of people. Apart from very few exceptions (and none spring to my mind straight away), for every billionaire there have to be millions of extremely poor people out there.

      I guess now there are some coming up with how the capitalists improved the life of all the poor people in the third world (lifted them out of poverty). I'm certain the capitalists didn't do that to improve those peoples lives, that was just a by-product, but to squeeze as much monetary value out of them as possible (probably cheaper than owning slaves a couple of hundred years earlier) and punish the workers back home for insisting on fair conditions and pay. Other by-products are less health & safety regulations and carbon emission export.

      A couple of months ago, there was the picture of a city in the US (Denver / Dallas can't remember) with kilometre long queues of people waiting for a food bank parcel… and I though how "lucky" they are, they can do this in a huge air conditioned truck.

      • WeTheBleeple 1.2.1

        Yes, but if the multiple thousands queued up for food had tuned into their local radio station they could have heard the good news: S&P breaks 3K.

    • Incognito 1.3

      Lawyers and teachers, health professionals and accountants – any hint of working class backgrounds there?

      I’d like to think that you worded this poorly because otherwise you’re one confused and misguided person.

      • Yes, poorly worded indeed.

        Having taught in one of the most prestigious private schools in the country and a decile 2 secondary school, my experience is that the chances of entering the higher (better paid professions) are stacked against the lower socio-economic classes Not that it can't happen – I've taught a few kids from decile 2 who have gone on to become doctors etc. But the pathway is much more difficult.

        So, a poor generalisation by me, but with a strong element of truth for all that.

        • Incognito 1.3.1.1

          🙂

          I thought as much, thank you.

          So-called social expectations have a profound effect on one’s psychology too. Good role models help, as do strong (support) networks. Making tertiary education as accessible to all as possible helps but on its own, it is not sufficient.

          I guess there will be a working class into the foreseeable future and maybe human society will always (!) adopt socio-economic layers and categories of one kind or another.

  2. vto 2

    Yep, the world was sold a jip by the right wing and capitalists over this and all other neoliberal crap.

    Lesson: don't listen to the right wing and capitalists again

  3. vto 3

    .
    push the wealth down and society strengthens and prospers

    push the wealth up and society weakens and fails

  4. Cricklewood 4

    Hopefully the current govt reads the paper and actually makes meaningful change…

    Wont hold my breath.

  5. RedBaronCV 5

    Yeah the Labour government could give the lower paid the tools (called unions ) to improve the distribution of wealth (even if only in the bigger corporations) plus haul in a lot more on the tax front particularly from those who have economically recolonised NZ.

    Gordon Campbell nails it. Pointing out that the RW would do what they want quickly.
    https://www.scoop.co.nz/stories/HL2012/S00063/on-labours-timid-uses-so-far-of-the-power-that-voters-have-given-it.htm

    Will they? Not looking like it will happen. They don't have the courage to seize the day. And there lies the signpost pointing towards the sort of disgruntled voter that Trump and Brexit has harvested

  6. RedBaronCV 6

    And if tax cuts actually increased productivity then it would be best to put them in at the low end to increase the productivity of the many millions not the few rich.

  7. Sabine 7

    well lucky we have a government who will do all it can to prevent any trickle up.

  8. AB 8

    Far be it from me to sound like a Marxist – but Thatcherism/Reagonomics/Rogernomics was always a class-based project, not an economic one. The results are what was intended.

  9. Scud 9

    Anyone who did 5th Form School Cert History or 4th Form History as I did at Hornby High. Would know when we looked the Depression of the 30's in the US under Hoover that trickle down economics theory is just a load of bollocks. No amount of dressing it up with today's fancy words from the PMC's or EPMC's is going to make it work as it will never work as the big end of town will always look after themselves first before anyone else.

  10. Mista Smokey 10

    Right-o you jokers, she's an oldie but a goodie.

    We can belt out the chorus, let's go:

    Poor Ned Kelly, it's easier to do, t'day.

    Poor Ned Kelly, y'don't even have t'run a-way

    Acknowledgement: Campfires

  11. RedLogix 11

    The entire 'trickle down' theory was always based on some very weak economic maths that assumed that the wealthy would always have opportunity to re-invest their surplus in cash flow positive, productive investments.

    Well Hyman Minsky more or less proved that idea wrong decades ago:

    Minsky proposed theories linking financial market fragility, in the normal life cycle of an economy, with speculative investment bubbles endogenous to financial markets. Minsky stated that in prosperous times, when corporate cashflow rises beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As a result of such speculative borrowing bubbles, banks and lenders tighten credit availability, even to companies that can afford loans, and the economy subsequently contracts.

    This slow movement of the financial system from stability to fragility, followed by crisis, is something for which Minsky is best known, and the phrase "Minsky moment" refers to this aspect of Minsky's academic work.

    In a nutshell Keen showed conclusively that it was far more effective to inject liquidity (essentially just money supply) into the hands of consumers … who could be relied upon to spend it … than it was to give it to business owners who may or may not invest productively.

  12. Adrian Thornton 12

    "Shock horror, trickle down does not work"…aaahhh I think this was exposed long long ago…not least when one of it prime architects admitted he dosn't know what he is talking about…BTW micky I think it it's about time Lange takes his fair share of the blame for this Neoliberal clusterfuck in NZ….we can't just keep heaping all the blame of Roger…also funny that you quote Piketty from The Guardian, when it just a fact that The Guardian have proved themselves to be one of the most ruthless guard dogs of this Liberal free market ideology and will actively go after any threat to this status quo.

    Greenspan Says “I Still Don’t Fully Understand” What Happened

    https://www.huffpost.com/entry/greenspan-says-i-still-do_b_137280

    • Incognito 12.1

      I don’t understand anything of your comment. For example, should we ignore Piketty and discredit his book because he/it was cited in the Guardian and what’s more, because it was reviewed favourably in/by “one of the most ruthless guard dogs of this Liberal free market ideology and will actively go after any threat to this status quo”? Sounds to me you’re shooting messengers but or rather because you have no real argument to make.

      • Adrian Thornton 12.1.1

        My comment is there to just remind the casual observer and those who easily forget that the Guardian has proved itself to be a neo liberal Trojan horse in the fight for real progressive change, it does more damage serious Left wing political projects in the west than any right wing news source does imo …. David Cromwell and David Edwards from media lens with one example of The Guardian’s bias….

        How The Guardian Undermines Jeremy Corbyn and the Left

        https://www.telesurenglish.net/opinion/How-The-Guardian-Undermines-Jeremy-Corbyn-and-the-Left-20160704-0024.html

        • Incognito 12.1.1.1

          I read your comment less as a “reminder” and more as an absolute and unconditional rejection of The Guardian as a source of information and considered opinion that’s worthy of our attention, i.e. B & W, because of a presumed anti-Left leaning across the board. Very few MSM outlets are ‘100% pure’ and neither should they be, when you think about it.

          Should we also ignore everything said by our MPs because of their obvious adherence to neoliberalism? We might as well terminate The Standard, in that case, unless we love charging at imaginary windmills.

          When finding information, e.g. in the form of a piece in a newspaper, it requires judgement based on content and merit rather than on author and source/medium to determine its validity and value. The same applies when reading and responding to comments on this site; repeating the same words and expecting a different outcome is a mugs game.

          I still don’t understand what you were trying to say in your comment @ 12 in response to the OP.

    • Macro 12.2

      Oh for goodness sake Adrian – stop being so blinkered and one eyed. Your dismissiveness of The Guardian is completely over the top when one can read weekly articles, such as Robert Reich, which are epistles consistently arguing against the Free Market.

      Take for instance:

      To reverse inequality, we need to expose the myth of the ‘free market’

      The debate over market v government serves to distract the public from the underlying realities of how the rules are generated and changed, from the power of the moneyed interests over this process, and the extent to which they gain from the results. In other words, not only do these “free market” advocates want the public to agree with them about the superiority of the market, but also about the central importance of the interminable and distracting debate over whether the market or the government should prevail.

      This is why it’s so important to expose the underlying structure of the so-called “free market” and show how and where power is exercised over it.

      It’s why I write a weekly column for the Guardian – one of the few publications in the world committed to revealing the truth about the economy and exposing the myths that distract the public’s attention from what is really going on. The Guardian can do this because it’s not financed by commercial sponsors or any party with a financial or other interest in what it reports but exists solely to serve the public.

      Inequalities of income, wealth and political power continue to widen across all advanced economies. This doesn’t have to be the case. But to reverse them, we need an informed public capable of seeing through the mythologies that protect and preserve today’s super-rich no less than did the Divine Right of Kings centuries ago.

      my bold

      And his latest contribution: The pandemic has made clear that corporations need more – not fewer – incentives to protect workers

      As a former secretary of labor, I often receive mail from workers with job complaints, who apparently believe I still have some authority. But the email I received a few days ago from a worker at Amazon’s Whole Foods delivery warehouse in Industry City, Brooklyn, New York, was particularly distressing.

      She said that six of her co-workers had tested positive for Covid-19 since 22 October, because “safe social distancing is not only being ignored but discouraged,” adding that “when we express our discomfort to management, we are yelled at about filling orders faster, or told that we can take a leave of absence without pay.”

      She ended by noting “we work for a trillionaire.”

      Well, not quite. Jeff Bezos is worth $180bn, making him the richest person in the world. And his corporation, Amazon, which also owns Whole Foods, is among the world’s richest corporations.

      Bezos has accumulated so much added wealth over the last nine months that he could give every Amazon employee $105,000 and still be as rich as he was before the pandemic.

      Amazon employees who go public with their complaints are likely to lose their jobs. The corporation prohibits its workers from commenting publicly on any aspect of its business, without prior approval from executives.

      So far during the pandemic, it has fired at least two white-collar employees who publicly denounced conditions at its warehouses, as well as several warehouse workers who raised safety concerns to media outlets.

      Amazon isn’t alone. A survey conducted in May by the National Employment Law Project showed that one in eight American workers “has perceived possible retaliatory actions by employers against workers in their company who have raised health and safety concerns” about Covid-19.

      I think that these two examples (and there are many more), give the lie to your contention that :

      The Guardian have proved themselves to be one of the most ruthless guard dogs of this Liberal free market ideology and will actively go after any threat to this status quo.

      • Adrian Thornton 12.2.1

        See my reply to Advantage…though I will remind you it was The Guardian that aggressively undermined Sanders in 2016 and Corbyn throughout his whole leadership of the UK Labour party, both the only politicians who actually threatened this liberal status quo…enough said.

  13. Maurice 13

    One of the better cartoons describing the "trickle down" theory was of an Ivory tower topped with reveling champagne drinkers with we proles gathered around the base watching the result trickling out of the piss tubes running down the walls like down pipes.

  14. Tiger Mountain 14

    Micky is on a roll–calling for action the other day on poverty, housing, and climate change. And that is good to see, because he is a grass roots Labour loyalist. Interesting though that while Jacinda has admitted to having a book by French academic Thomas Piketty on her shelf, she also admitted she had not got around to finishing it! Draw your own conclusions, but I would say she is ideologically limited and committed to Blairism.

    Jacinda and Robbo with their majority, do not need to try and “turn back time” to Tony Blair’s 90s. A number of Nats even, that voted Labour on the COVID factor (and the Nat collapse factor), are mystified why the Labour Caucus have not already done, or at least signalled, that they will reverse on CGT, raise benefits, and build houses and apartments like crazy. After all, a number of middle class people have now experienced the tender mercies of WINZ/MSD.

    Labour has nothing to lose really, if some of the switchers revert to form, so what. The Greens would likely embrace being a proper part of a 2023 Govt.

    • Phillip ure 14.1

      that is what really puzzles me..

      what the hell are they scared of..?

      of course they will shed some of those nats they got this time..

      and they are damned if they do..and damned (by their own)..if they don't..

      so what is stopping them…?

      because the greens are there as back-up…

      (strategically tho' it would suit the greens if ard-robbo don't do much..

      'cos if that happens labour people wanting change will turn to the greens and the maori party @ at the next election..

      and that could be a very good thing)

      see..that also puzzles me…can't ard-robbo see that politics 101 fact..?

      so..I repeat..

      what the fuck are they scared of..?

      did they have a couple of bad focus groups..?

      (groups that of course that always have poor people in them..)

      if not lack of political logic..can it be ideology..?

      does the very idea of returning dignity to the poor…stick in their (political) craw…?

      are they really labour in name only..?

  15. Obtrectator 15

    Trickle-down might just have worked, up to a point, if the wealthy had gone on to pay a fair rate for goods and services. Instead, they've used their economic clout to drive wages and prices to impossibly low levels. The trickle goes a little way down, then dries up altogether. Another example of how good ol' human nature gets in the way of fancy socio-economic theories dreamed up in academics' offices far removed from the actual sites of wealth creation.

  16. millsy 16

    Trickle-down economics isnt limited to matters of taxation.

    Deregulation is also a form of trickle down.

    The RMA is a case in point – "freeing up land" for developers to build more luxury housing in the hope of a few cheap houses as well.

  17. Brendan 17

    I read somewhere that trickle down does work – in a tax haven. Problem is that it then forces up cost of living for everyone else.

  18. UncookedSelachimorpha 18

    Good article. We actually have "flood up", where the wealth of the many rapidly accumulates to the wealthy few.

    What we need now is a government who will believe and act on the facts on trickle down. Rejecting the wealth tax has the same effect as tax cuts for the rich – and it seems very likely to me that those who rejected it must believe in trickle down, it is difficult to think of any other justification (unless it was cynical politicking by people who knew what they were doing was illogical and harmful to society)?

  19. UncookedSelachimorpha 19

    At first you won't think this has anything to do with this post….until about 1:20

  20. Ad 20

    Inequality (and the factors that cause it) is an utterly forlorn political issue.

    Yet it's so weird to have facts on in equality that are so right …

    http://www.inequality.org.nz/understand/

    Trying to get the attention of 90% of all our Parliaments for the last two decades hasn't worked.

    Nor is there any imaginable New Zealand parliament that will take this on in future either.

    Which kinda sucks, given the New Zealand I grew up in through the 1970s.

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