50 Years of Trickle-Down Economics Didn’t Work

posted by Jason Kottke   Dec 21, 2020

Trickle-down economics is the economic theory that lowering taxes on the wealthy and on businesses will stimulate business investment to the long-term benefit of society. The idea is that by sprinkling a huge amount of money into the bank accounts and stock portfolios of the wealthy, a portion of that money will “trickle down” to everyone else. Despite ample evidence that it hasn’t worked, trickle-down has been an economic driver for discussions about taxes in the US since at least the Reagan administration. The newest research that argues that tax cuts for the rich don’t work for anyone other than the rich comes in the form of working paper by David Hope of the London School of Economics and Julian Limberg of King’s College London called The Economic Consequences of Major Tax Cuts for the Rich. From the press release:

Our results show that…major tax cuts for the rich increase the top 1% share of pre-tax national income in the years following the reform. The magnitude of the effect is sizeable; on average, each major reform leads to a rise in top 1% share of pre-tax national income of 0.8 percentage points. The results also show that economic performance, as measured by real GDP per capita and the unemployment rate, is not significantly affected by major tax cuts for the rich. The estimated effects for these variables are statistically indistinguishable from zero.

And the authors’ conclusion:

Our results have important implications for current debates around the economic consequences of taxing the rich, as they provide causal evidence that supports the growing pool of evidence from correlational studies that cutting taxes on the rich increases top income shares, but has little effect on economic performance.

Limberg connected the results of the research to post-pandemic economic recovery:

Our results might be welcome news for governments as they seek to repair the public finances after the COVID-19 crisis, as they imply that they should not be unduly concerned about the economic consequences of higher taxes on the rich.

Former US Labor Secretary Robert Reich agrees that the US should tax the rich to invest in public infrastructure.

The practical alternative to trickle-down economics might be called build-up economics. Not only should the rich pay for today’s devastating crisis but they should also invest in the public’s long-term wellbeing. The rich themselves would benefit from doing so, as would everyone else.

At one time, America’s major political parties were on the way to embodying these two theories. Speaking to the Democratic national convention in 1896, populist William Jennings Bryan noted: “There are two ideas of government. There are those who believe that, if you will only legislate to make the well-to-do prosperous, their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous, their prosperity will find its way up through every class which rests upon them.”

Build-up economics reached its zenith in the decades after the second world war, when the richest Americans paid a marginal income tax rate of between 70% and 90%. That revenue helped fund massive investment in infrastructure, education, health and basic research — creating the largest and most productive middle class the world had ever seen.