Trickle Down Economics

“Trickle down economics” is a term used to justify tax breaks for the rich. The theory is that when the wealthy receive a reduction in their income tax, they will spend and invest that savings. The overall economy will benefit, and the working middle class will somehow benefit indirectly through that money “trickling down” to them in some way. Yes, capitalists will get the initial break, but the theory is that ordinary workers will become more productive when equipped with more capital. They’ll become more valuable to their employers and will get paid more. Labor will also directly benefit through cutting taxes on the rich. Cutting income taxes on rich entrepreneurs so they keep more of what they earn will induce them to work harder, invent more, start more companies, and hire more employees. That’s the theory anyway, and, in their attempt to discredit this theory, liberals have been relatively successful in creating dissatisfaction in the working middle class (according to the most recent surveys). This they know they must do to regain control of our government in the future.

What do the Republicans have to say in defending the tax cuts for the rich? Well, it seems they try and justify tax cuts for the rich by pointing to how trickle-down economics once worked to benefit all Americans during the Reagan years and how it will work again this time around. When asked whether they still believe in trickle-down economics, Secretary of State Steven Mnuchin said “Uh, uh, I do.” So then, according to Mnuchin, Republicans who passed this bill expect trickle down economics to work.

So, what does it take for the trickle-down economic system to function the way it’s supposed to perform? Economists tell us that for trickle-down to work best, it takes a limited capacity which will constrain the production of commodities; marginal investment which has been stimulated by the tax cuts and flows into capacity; increased capacity is directed toward the production of commodities; the creation of excess capacity exerts downward pressure on prices; lower prices on commodities can stimulate marginal demand; increased commodity production requires additional employment; and economic stimulus is sufficient to offset the cost of tax cuts. Considering the fact that the tax cuts on the rich alone will result in over billions of dollars of lost revenue, this last condition is what the Republicans are counting on to happen so that the deficit won’t spiral out of control.

It would take an economist to thoroughly understand these reasons I just listed, and most folks in the working middle class aren’t well versed in this discipline; but it doesn’t take an economist to see that the rich are also receiving a substantial tax cut in this new law, and the majority of Americans don’t believe the rich need such a break even if somehow some of it does trickle down to them.

Recent surveys support the fact that indeed, the majority of working middle class Americans aren’t buying the trickle-down theory. They have  expressed disappointment over this new tax law despite the fact their tax burden has been substantially reduced. Could it be possible that they have reached the same conclusion the Urban-Brookings Tax Policy Center has reached: The new tax law gives the biggest benefits to people just below the top one percent of incomes in 2019 and 2015 (benefits being measured as the percentage change in each group’s after tax income)?

Peter Coy recently wrote an article for Bloomberg Business Week entitled “Trickle, Shmickle.” Based on the title, we can assume he’s not in favor of trickle down economics and we would be right. Coy does say though that “just because trickle-down economics is easy to make fun of doesn’t mean it’s wrong. In fairness, one must seriously consider the possibility (italics mine) that society as a whole will benefit from a tax policy that seems tailor-made to benefit the rich.” We know that economics isn’t an exact science like biology so, sure, there’s always that possibility. After all, it seemed to work for the Reagan tax cuts. Back then, we called it “Supply-side economics.”

But that was then, and this is now. Back then we were just coming off of double digit inflation, and some economists believe trickle-down works best in such an environment. Now of course we are in a low inflation economic environment. Will it work the way it did in the Reagan years?

Coy doesn’t believe trickle-down will work this way in these times. He refers to the new tax  law provisions for businesses as an example to support his conclusion. He points out that theoretically “the case for trickle-down in the U.S. is that companies would love to expand their businesses but are holding back because they don’t want to have to pay so much in taxes.” Are businesses planning on expanding now that the tax proposal has become law? Will trickle-down even be given a chance to begin to work the way the theory is supposed to work?

One particular surveys says it won’t be given that chance. The Bank America Merrill Lynch survey this year asked companies what they would do if they were allowed to repatriate foreign-held profit at a reduced tax rate. Capital spending came in fourth, behind debt repayment, share repurchase, and mergers and acquisitions.” Apparently, testing whether trickle-down will work or not will just have to wait awhile for us to see if it works this time around.

Regardless, it’s obvious a person doesn’t need to be an economist to see that something’s wrong with the trickle-down economics theory. Coy states that if it were true, the wealth gap would be self limiting. “As soon as the rich started getting richer, wealth would cascade like the Niagara down to the benighted lower classes. Instead, the gap between rich and poor keeps growing.” It is this growing gap that liberals have also exploited to create division and dissatisfaction in the rank of file of the working middle class.

Will this dissatisfaction disappear when these workers receive their first pay check under the new tax law? It remains to be seen whether their approval of a higher take-home pay will neutralize their unease over the wealth getting even more of a break. If the working middle class remains dissatisfied, and that dissatisfaction motivates them to abandon the Republican Party in the next election, well then, America will be back on track to becoming more socialized, surely the worse of the two evils. Socialism doesn’t cure the wealth gap, it increases it; but that subject’s best covered in reading what Wallace Garneau has to say about this in his post on his website, The Daily Libertarian.

So then, my point is that throwing the Republicans out of Congress for giving the wealthy a tax break will be like throwing the baby out with the bath water. If this happens, the Republican Party will have squandered a big opportunity to keep the working middle class happy campers; and, if they lose them, it will be a long time before they get them back again. The opposition party is keeping their fingers crossed.

 

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