Trickle-Down Economics: Handout To High-Income Earners Or Benefit To The Middle Class?

Nothing seems to rile economists up on both sides of the equation than the concept of supply-side economics. This term is known by a few different terms. Since World War II, it has been described by some, including the famous performer and social commentator, Will Rogers, as “trickle down” theory.

There’s a host of questions that come up when we talk about supply side theory. Does it work? Is it fair and just? Some even question its very existence, and argue it’s never actually been a governmental policy.

Let’s take a deeper dive into where this theory came from, who is for and against it, and whether they are real world examples of it being put into practice or not. 

What is Trickle-down theory?

Basically, the idea of supply side economics is that income tax rates should be adjusted so as not to have such a proportionally large impact on high income earners or profitable companies and corporations. The theory is that this will act as an incentive for those wealthier taxpayers to spend more, pumping more into the economy, which will then stimulate economic growth.

It’s fair to say that this public policy of lowering taxes on the top tax rates to benefit the economy as a whole is something embraced by the republican party. When most people think of trick down economics, they think of President Ronald Reagan. In fact, the term “Reaganomics” is usually applied disparagingly to the economic theory

The use of the term does date back before the Reagan Administration, however. Will Rogers used this term to describe the economic stimulus policies of depression-era president Herbert Hoover.

Some of what underpins supply side economics is the famous Laffer curve. This theory was advanced in the mid 1970’s by economist Arthur Laffer. It essentially suggests that cuts in very high tax rates may correspond to economic stimulus in an amount greater than a dollar. Therefore, the decrease in tax revenue may be offset by greater economic activity and consumer spending. Paradoxically, this increases tax revenue despite lower rates.

Is it just?

While some may dispute the extent to which supply side economics have ever been the policy of the government, it is useful to ask whether or not such a policy is just in the first place.

The argument goes that by stimulating the economy through tax cuts, all parties win. In other words, “a rising tide lifts all boats.” 

Mr. Jones And The Greens: An Argument For Tax Breaks For the Top Earners

Let’s imagine a hypothetical scenario. Mr. Jones is a wealthy real estate developer. He earns about a million dollars a year, and pays around 400,000 in federal income tax, or, 40 percent (just to make the math easy.) Congress and our hypothetical president, have decided to lower his taxes 5 percent. His new federal tax rate is 35 percent. He now has 50,000 extra dollars to spend.

Mr. Jones is usually fairly frugal. Now that he has an extra 50 grand in his pocket, he decides to bring his 3 children to his local, independent shoe store owned by Mr. and Mrs. Green. The shoe store has been having a hard time making ends meet lately. In walks the Jones family, who each buy 3 pairs of the latest and greatest basketball shoes. 

You could say that the tax savings that were bestowed upon the Jones trickled down to the Greens. The Greens are able to use those extra sales to reinvest in the business, or to simply pay their own bills.

There’s infinite variations on this example, and a host of intermediate parties. The idea is that when those at the top of the tax pyramid get a break, they spend that money benefiting all the businesses and parties below them.

A lot of focus is usually placed on who is “hurt” more by taxes. This was a central theme to the presidential campaign of Dr. Ben Carson. He proposed a simple flat tax, based on biblical tithing. 

Mr. Harris and the Williams Family: An argument against Trickle Down Economics

On the other side of the coin are people who argue that tax policy based on making more money available to billionaires is unjust. Their argument is certainly more emotionally grounded than a true economic analysis. 

Imagine Mr. Harris. He’s at the head of a company that manufactures kitchen timers. Like Mr. Jones, he earns a million dollars per year. He receives a tax break from a likely republican president and congress.

Now, instead of spending the money, sending it cascading down to the needy masses, he decides to just stick it in his bank account. The Williams Family, who owns a tiny bakery down the hill from Mr. Harris’ mansion sees no additional sales after that tax break, and ends up going out of business the next month. They lose everything, and end up as another sad consequence of disastrous American tax policy.

What Are Some Real World Examples of Supply Side Economics

One of the most frequently cited examples is the so-called bush tax cuts. In the wake of the September 11th terrorist attacks, the economny was headed into recession. Seeking to combat this, President Bush signed into law a series of tax cuts, a jobs act and capital gains rate cuts. 

Some may view these as a handout to the rich. Others view them as a necessary form of stimulus that aided in a recovery, which led to several years of an improving economy.

In 2017, President Trump signed another Tax Cuts and Jobs act. This changed the tax code to cut the corporate tax rate greatly, from 35 percent to 21 percent. Critics said this perpetuated income inequality by providing a disproportionate benefit to the wealthy and harm to the lower income brackets.

Did It Really Even Happen?

Brilliant economist and fellow of the Hoover institution, Thomas Sowelll argues that no tax policy has ever really been simply a “tax cut for the rich,” and the whole idea of “trickle down economics'' is simply a bogeyman advanced by democrats and those on the left. In other words, higher taxes impact everyone, and lower taxes benefit everyone. It’s a fascinating question, and one that deserves more study.