The Trumped Up 'Trickle Down' Economics Myth
Every time Republicans propose tax changes that might in some way benefit the wealthy, the trumped-up myth of “trickle-down economics” – first coined by a Franklin Roosevelt speechwriter – resurfaces. Immediately after the release of the tax proposal put forward by President Trump and Republican congressional leaders, opponents didn’t disappoint.
“Trump’s tax plan is a self-serving rehash of trickle-down economics,” headlined an editorial in The Philadelphia Enquirer. “Trump will be selling old Republican idea: ‘trickle-down’ job growth,” wrote Victoria McGrane in The Boston Globe. Numerous commentators on television similarly proclaimed the same, contemptuously labeling the “Unified Framework” as “trickle-down economics.”
This supposed “economic theory,” I guess, is thus: by cutting taxes on the rich, the benefits will “trickle down” to everybody else. I categorically reject the notion that such a theory even exists, and submit that it is worth disputing.
RealClearMarkets editor John Tamny recently expressed to me that the phrase “trickle-down economics” never bothered him because “when enterprise is rewarded on the way to great wealth, the benefits reach everyone.” I agree. So why not just accept the “trickle-down” lie and move on?
Because, not only is this term a derisive one which connotes adverse thoughts about economic inequality and disdain for those who (purportedly) wish to subjugate disadvantaged groups – it is a fundamentally mythical and misappropriated concept.
The idea of “trickle-down theory” is nonexistent, except as perpetuated by those opposed to across-the-board tax rate cuts that include the wealthy. As Dr. Thomas Sowell observes in his 2012 treatise, ‘Trickle Down Theory’ and ‘Tax Cuts for the Rich’, “No such theory has been found in even the most voluminous and learned histories of economic theories, including J.A. Schumpeter’s monumental 1,260-page History of Economic Analysis.”
No serious or prominent conservative, politician or free market thinker has espoused this “theory” either. It is the standard straw man – or, as Dr. Sowell puts it, “a classic example of arguing against a caricature instead of confronting the argument actually made.”
The “trickle-down” concept suggests two inherent fallacies that ought to be illuminated. First, it portrays a reversal of economic events, suggesting that profits will “trickle down” only after the “rich get richer.” Second, it posits that the benefits experienced by others are intended as a mere side effect of lower-tax policy; in truth, this is an instance of a rising tide lifting all boats.
Dr. Sowell essentially addresses both fallacies in his essay. He notes, “Workers must first be hired, and commitments made to pay them, before there is any output produced to sell for a profit, and independently of whether that output subsequently sells for a profit or at a loss. With many investments, whether they lead to a profit or a loss can often be determined only years later, and workers have to be paid in the meantime, rather than waiting for profits to ‘trickle down’ to them.”
“The real effect of tax rate reductions,” Dr. Sowell concludes, “is to make the future prospects of profit look more favorable, leading to more current investments that generate more current economic activity and more jobs.”
The “trickle down” myth further suggests that there is a zero-sum game being played, and that by the wealthy benefiting from tax rate cuts, lower- and middle-income people necessarily lose out. As explained in the quotation above, this is a fallacy – and the real world bears it out.
In 1981, President Ronald Reagan approved an across-the-board 25% cut in individual marginal tax rates, reducing the top rate from 70% to 50%. In 1986, the Reagan Congress passed sweeping tax reform, reducing to just two tax brackets and slicing the top rate from 50% to 28% by 1988.
As Brian Riedl recounted in May of this year, the Reagan years brought a tremendous, broad-based economic recovery – following a double-dip recession – that we did not see during the Obama years:
“[The double-dip recession] was followed by a seven-year economic boom that saw the economy expand by 36 percent and inflation-adjusted median family income rise by 12 percent, along with the creation of 19 million net jobs (the equivalent of 25 million jobs in today’s larger working-age population). By comparison, in the seven years following the 2007–09 recession, the economy expanded by just 16 percent, median income rose by less than 3 percent (over six reported years), and only 11.6 million net jobs were created. Had this recent ‘recovery’ matched the Reagan recovery, the current GDP would be $3 trillion larger” (emphasis added).
The Kennedy-Johnson tax program of 1964 – dropping the top rate to 70% from 91% – are another case-in-point. While the Eisenhower administration actually saw low growth rates and three recessions, the Kennedy-Johnson years experienced no quarters of negative growth and, contrarily, substantial growth after the cuts. (In 1966, the economy grew 6.6 percent and unemployment fell to 3.8 percent.)
The Reagan and Kennedy-Johnson years demonstrate that the opponents of tax rate cuts have the wrong analogy: these policies lead to a rising tide that lifts all boats, not benefits “trickling down” from rich to poor.
Now, if we’re going to talk about “trickle-down economics,” let’s discuss its true source: the welfare state. It’s the theory that, by taxing one group (the upper and middle classes), filtering it through the hands of government and redistributing it to another group (the poor), the benefits will trickle down and the recipients will be better off.
That’s the real “trickle-down theory.” And yes, with a poverty rate today near parity with 1968, “trickle-down” is a proven failure. It’s just not the failure you might have thought.
