Jimmy’s Colorado Politics Column | ‘Trickle down’ is left’s straw man
Written by Jimmy at the Crossroads on July 6, 2021
In his weekly Colorado Politics column Monday, the eloquent Miller Hudson wrote on striking an economic balance in society. “Should we spread the wealth?” he asks. “Or should we allow wealth to trickle down at the whim of the 1% of Americans who are capturing 99% of new earnings in the American economy? There should be limits placed on either approach, but democracy is the best political system for making these choices.
While I’d passionately counter that government should never attempt to achieve “equitable distribution” of wealth, there’s something Miller Hudson says that I respectfully believe fundamentally misses the mark. It’s a mistake many critics of across-the-board tax-rate cuts frequently make.
Miller talks about this supposed idea of letting wealth “trickle down” from the richest, commonly called “trickle-down economics.” The premise is that Republicans, conservatives and libertarians believe that, by cutting taxes on the wealthy and on businesses, the benefits will “trickle down” to everybody else.
However, “trickle-down” is nothing more than a derisive term bringing to mind false fears of worsening economic inequality – and no credible economist or policy maker actually argues for this economic theory. In reality, “trickle-down economics” is a myth first coined by a speechwriter of President FDR and subsequently perpetuated by Democrats as a rhetorical device. For the sake of argument, I will define it as a disparaging critique of tax cuts.
As economist Dr. Thomas Sowell explains in his 2012 booklet, “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 free market advocates have adopted this concept, either.
“Trickle-down economics” is simply a straw man which implies that profits are supposed to “trickle down” after — and only after — the “rich get richer.” Yet this is a reversal of economic events. Moreover, “trickle-down” suggests the financial gains others receive are only side-effects of lower taxes on business and investment. They don’t benefit nor are intended to benefit the economy at large.
Sowell debunks these fallacies. “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,” he writes. “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.”
Sowell finds the true effect of reducing tax rates “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” illusion also posits that wealth creation is a zero-sum game: If wealthy investors and big businesses benefit from tax rate cuts, lower- and middle-income people will always and necessarily lose out. Contrarily, wealth in America is regularly growing, meaning the pie is getting bigger. It’s not like there’s a fixed amount of wealth and the average pie slice shrinks while the richest slices grow. The real world demonstrates this.
For example, in 1981, President Reagan approved an across-the-board 25% reduction in individual tax rates, cutting the top rate from 70% to 50%. In 1988, he simplified the tax code to just two brackets, chopping the top rate from 50% to 28% by 1988.
According to Manhattan Institute’s Brian Riedl, Reagan’s presidency bought a vibrant, broad-based recovery. “[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).” (emphasis added).
In 2017, President Trump signed his tax reform bill, the Tax Cuts and Jobs Act. TCJA reduced most individual income tax rates, sliced the corporate tax rate from 35% (one of the highest globally) to 21% and enabled businesses to expense the full cost of investments through 2022. The main goal was to enhance business investment and job creation.
While assessing the economic impact of TCJA is complicated due to simultaneous and costly trade uncertainties, the sudden shock of the COVID-19 pandemic in Spring 2020 and the fact that more time is needed to evaluate long-run data, we have learned a few things.
A comprehensive economic analysis of TCJA from the Heritage Foundation found that TCJA strengthened the labor market and thus boosted average employee earnings year-over-year, especially for production and non-supervisory workers who averaged $1,406 in “above-trend annualized earnings.” Additionally, TCJA spurred increased employment, brought the number of job openings to record levels and substantially improved job mobility.
The Reagan and Trump tax cuts reveal just how flawed the “trickle-down” analogy is. Reducing the tax burden on businesses and investment leads to a rising tide that lifts all boats, not benefits “trickling down” from rich to poor — a view nobody espouses anyway.