This tweet recently attracted my attention.
It linked to this article that said this:
Donald Trump’s signature legislative achievement was the corporate-tax cut he signed in 2017. Republicans said it would grow the economy by up to 6 percent, stimulate business investment, and pay for itself.
None of those promises have come to pass. GDP growth has declined to less than 2 percent according to the latest report, released yesterday. Business investment has now declined for two straight quarters, dragging down economic growth. And the federal deficit exceeds $1 trillion.
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.