Why trickle-down economics works

Firstly, I want to make one thing clear, that I am addressing to these sets of policies as “trickle-down economics” and not “Reaganomics” on purpose, purely to try and debunk the mocking and myths of the socialists who argue against these policies.

Trickle-down economics is one of the most contested issues of the 20th century, with the calumniation of some fooling the general populace into thinking that “Reaganomics” somehow fails. However, over the past few years, a larger and larger proportion of the population have been seeing beyond this much propagated lie, and seeing the voice of reason, instead. This voice says that Reaganomics will obviously work because of a few simple reasons, which are really not too hard to pick out. Of course, hardcore socialists will say that Reaganomics will not work, however their theories will be debunked, not by the capitalists, but by logical thinkers who actually see why these economic policies will succour the positive growth of America. The first reason why trickle down economics works is that it discourages outsourcing.

As seen in France, when the rich are taxed heavily, then very often, they leave very quickly. These departures frequently lead to the eventual collapse of an economy, shown by France’s rapidly decreasing economic growth over the past five years. When you give tax cuts to the rich, you are making sure that they are not incentivised to leave, and therefore you maintain a strong tax base with which to spend. Do not be fooled by socialist propaganda telling the lie that it is the normal person, the average Joe, that fuels the economy of America, or any country, in fact, because it isn’t. As much as you and I would love for this idealistic reality to be the case, it simply is not true. It is the rich and famous that encourage growth and economic expansion, as it is only when they have more money in their pockets that they can employ more people, meaning that without this, less people will have a job, and therefore the government will have a larger pool of money to spend.

While trickle-down economics ensures that the rich will not leave the country à la France, it also encourages the growth of small businesses, which will only make sure that innovation levels increase, logically spurring the economy. It is an obvious axiom that when people have more money in their pocket, they will choose to spend it (unless you are in a saver’s economy such as Japan or India), meaning that more small businesses will be created. This will obviously increase employment levels, and therefore increase the revenue that the government receives from tax. This money will further be spent by the government, creating a positive spiral of economic expansion, prosperity, and growth. It is only when people have money in their pockets that they can try something new, and trickle-down economics recognises this, and ameliorates the issue by cutting taxes.

Finally, a common argument put forward by detractors of trickle down economics is that it does not work because the rich hoard the money. However, the only place the rich will put the extra money that they have is into other economic industries, meaning that the money they save will always be reinvested, and that, as the cost of starting up a small business goes down, more people will attempt it. It’s no secret that the Reagan administration presided over the lowest unemployment in years, from an unemployment rate of 10.2% to an unemployment rate of 4.9%. This cannot have simply been achieved by the rich “hoarding money” as some socialists will say, but from capital consistently trickling down the classes of the U.S.A., which logically reduced unemployment. It is my firm belief that these trickle-down economic policies will be looked upon more generously in future, with people realising that the policies they so detracted were actually some of the best ones that America has ever had.

25 Comments Add yours

  1. Ben says:

    This is an argument many still have because it makes perfect sense at first glance. But, it simply doesn’t work in practice, I might waffle on a bit, be warned…

    It’s 2015. Share buybacks are at all time highs, lower than business investment in fact. The stock market has been booming for 7 years. If you had a billion pounds, would it be more profitable to invest that money in assets and reap the benefits (like you’re doing, by the way) or put in the huge effort and risk of setting up a business and employing people? Well more wealthy people are doing the former and it has completely disproven the legitimacy of supply-side economics in my view.

    This is because corporations have got more and more efficient, mergers more common and provide less to their workers. Corporations provide less jobs, often push for lower pay and zero-hours contracts and generate less innovation due to the lack of real competition. Trickle-down economics cuts jobs, it doesn’t create them. There’s no point of setting up a small business that’ll find it almost impossible to compete when you can buy a share of a global, massively profitable, growing one instead.

    This has made society vastly unequal. The top 1% of the world own as much wealth as everyone else on the planet and it’s predicted to rise to them owning 70% of global wealth by 2050, you cannot say that’s a system that’s working but the trickle-down ideas are still implemented causing inequality to continue its endless rise. So, I ask you, is it better to tax the rich more and spend that money through government which can create growth, innovation and prosperity or rely on the wealthy to generate those things when there’s less and less of an incentive to do so and will likely instead just pocket it and buy a few more shares?

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    1. Thanks for the comment! 🙂 In my opinion, the problem with what you are proposing is that you are disregarding basic human nature. If taxation levels increase, there will be more of an incentive for the wealthy to leave, meaning that more and more people will be out of a job. If we tax less, the rich will stay AND more businesses will have the start-up capital to start their businesses. This was evidenced by the drop in unemployment to 4.9% during Reagan’s presidency.

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      1. Dev Khemani says:

        I side with Shrey. Consider a millionaire whose taxes have been cut to 40% from maybe 60%. They have more money in their pockets, so they will psend more money. this maybe on material things, eating out more often etc. The businesses that offer these goods and services, which the millionaire is buying more of, will benefit, as it will receive more revenue from the spending of the rich. That business will grow, increasing its demand for workers.

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      2. Ben says:

        Reagan was president in the boom years of the early 80s, from the recession in the early 80s. There’s proof that taxing the wealthy more does raise more money. Also, capital isn’t limited by borders anymore, it doesn’t matter where the rich live they’ll invest in a business anywhere if it’s attractive to them. The potential benefit however of taxing the wealthy properly and redistributing the wealth more fairly would be huge for the economy as poor people are willing to spend more, especially in their own country.

        Also, @dev Khemani: that also means there’s less money in the government’s pocket which go disproportionately to the poorer in society who spend a greater percentage of their income than the rich, which means more of that money will be spent meaning businesses benefit more along with the economy as a whole.

        Liked by 1 person

      3. jwbutler2005 says:

        But what about Reagan changing the way unemployment was calculated and the fact that unemployment only dropped after Reagan rescinded the tax cuts.

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      4. kman says:

        I say tax the rich. Are they really going to leave the US? Much more likely that the rich will stay and outsource jobs to China to workers making minimal wages. Can anyone deny this has happened? No one can deny that the distribution of wealth has grown exponentially between the rich and the middle class since Regan and trickle down. Trickle down has worked great for China.. horribly for the US

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      5. David says:

        What your proposing is economic kidnapping. Give into the demands of the wealthy or they’ll leave. Which they will do regardless, to take advantage of other incentives like cheap labor from unregulated territories.

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    2. cheekos says:

      Some great points! R & D has been advanced predominantly through government funding. Think of the Internet, color TV, jet airplanes, pharmaceuticals, space travel–and then they were passed-on to industry. That research and development has created many, many jobs. Small businesses create the bulk of jobs; while, as the writer notes, large corporations just talk a great game, but can’t show the proof.

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      1. cheekos says:

        Dev Khamani, millionaires really do not eat out more often, just because they have an additional $200,000 in Disposable (post-tax) Income. Whether with $400,000 or $600,000, they can probably already dine out as much as they wish. As noted in another comment, the excess cash generally gets socked away somewhere.

        That family that earns, let’s say, $50,000-$75,000 per year, with a tax break, will indeed spend it. There is always shoes for the children that have been deferred, finally getting the old clunker repaired, an occasional family outing or dining-out at a moderate-priced restaurant can do a world of good for everyone.

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  2. John says:

    OP’s argument boils down to trickle down economics works because if you don’t do it the rich will leave, and they spend. Also under President Reagan unemployment dropped substantially.

    Lets look at these arguments in turn. Taxing the rich makes them flee. It is hard to argue with this, as there are people who will leave because of taxes. I can’t speak to Europe, but if that was a universal truth there would be no rich people in California, New York, and Illinois. Clearly there are rich people there, so on holistic level, OP’s argument doesn’t make any sense. But it doesn’t make sense on a Micro level either. Assume that the marginal tax rate on the rich went from 40% to 50%, each person effected by that change would have to make the determination or not to move based on that change. That moving entails a cost. If you’re dealing with income tax, wherever the person moves to, there may not be that same income stream available there. Add to that high-power and high-paying jobs are pretty rare. One of the reason so many high power finance guys live in New York, is because that is where the high power finance jobs are.

    So, for this argument OP 1) overstates the number of rich people who will move, and 2) provides no justification for saying the french economy declined because rich people, and 3) provides no justification that France and the US are so alike that they can be comparable in this matter.

    That is also OP’s best argument.

    The tax cuts that Reagan introduced in 1981 saw unemployment rise from 7.5% in 1981 to 10.8% in late 1982. Only after Reagan roll back his tax cuts in 1983, did those rates drop. Also during that time Reagan redefined unemployment to exclude the military all the while building up the military this depressed unemployment even further.

    With high unemployment Reagan did just what FDR did, use government spending to drive that number down. Which is the opposite of Trickle Down economics.

    What the OP also doesn’t bring up is that GDP growth in the United States was at its highest ever in the 1960’s when marginal tax rates were at their highest. Also during this period the dollar had its highest purchasing power ever.

    Now, Laffer and the OP have a point. You can tax an economy to death. The problem is we are no where near that point and are in fact on the other side of that curve, where few taxes will only depress the economy. Kansas, Wisconsin, and Louisiana all stand as examples of tax cuts not improving the economy.

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    1. War says:

      The issue of taxation is much more complex and the solution to our global problems will not come from the same tired old theories.
      There is a middle ground between the two polar opposites of trickle down and socialism that will likely produce the best chance at solving poverty globally.

      Perhaps we should focus on the fundamentals though…..
      1) the fact that we’re reaching finite limits of various resources and are showing signs of sliding towards global deflation
      2) fixing the issues of debt creation by private banks for governments and interest on those loans dragging everyone down
      3) more and more jobs being taken by machines while simultaneously we have more and more people being born every year…..we need a plan to deal with this

      I’ve veered away from the subject a bit but my mind tends to see the big picture and general trends which are key to really getting a handle on where we’re headed…

      Liked by 2 people

  3. nitpicker says:

    The flaw in this argument is that very rich people neither spend nor invest.

    To pick on one of our favorite punching bags, a Koch brother at 40B is approximately as rich as 800,000 typical Americans. Does he buy as many hamburgers as 800,000 people? Does he get as many haircuts? Take as many vacations?

    Because of a lack of demand (customers) big money is reluctant to invest. Why spend to increase productive capacity if no buyers are in sight? Instead, they put their money into existing assets, like real estate in Manhattan and London and Dubai. Also Old Masters paintings and thousand dollar bottles of wine and 1957 Ferrari 250 Californias. And, of course, stocks.

    None of these activities create jobs or trickles anything down in any meaningful quantities.

    As the famous economist John Wayne once said, “Don’t piss down my back and tell me it’s raining.”

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  4. Jonathan Nicholson says:

    The premise of the trickle down affect is offensive. This is a wholly offensive piece. Even if you agree with the theory, language like “down the classes” is inappropriate. There are other examples too.

    Like Peter Mandelson said “We have no problem with the filthy rich, so long as they pair their taxes.” Some people would rather pay *no* tax. Read about the Panama Papers and the numerous other articles about tax avoidance and evasion. Tax is the price of a civilised society.

    The argument also falls apart when you say that the “average Joe” (oh, and what about ” the average Joanne”?) is the wealth creator, but then you say its “the rich and famous” who are the wealth creators. Who started this process?

    Don’t the “average Joe and Joanne” and the “rich and famous” contribute to an economy in different ways? Or do you think the person serving you in the restaurant is leeching off the wealth creator’s endeavours? That your waiter or waitress is serving you out of some sense of altruism towards you? I’m so glad they have your permission to contribute. Like the World Economic Forum say “No-one lies on their death bed and wishes they worked more.”

    Economic growth is also caused by more ‘grassroots’ moves. When a public limited company wants to expand they sometimes issue shares. Pension funds often invest in share issues. Its one of the reasons stock markets matter. You wouldn’t have pension funds if the “average Joe/Joanne” didn’t work and their boss didn’t invest in a pension fund. Individuals contribute to firms, firms contribute to industries, industries contribute to economies.

    Of course the facts about the US economy cannot be doubted. I don’t know of anyone who says the statistics are false. A salary is a legal obligation, unless you work for a charitable organisation when there are volunteers, but that’s a different issue. No-one should be praised for paying their staff. From an economic perspective one of the greatest things the abolition of slavery in the United States did was to kick-start economic growth. Its because mechanisation meant labour became cheap and abundant and supported manufacturing (its a little more complex, but for a WordPress comment…).

    There’s also a fairness argument for progressive taxation. The rich, who have benefited the most from societies opportunities and society itself, pay more to extend those same opportunities to people who might not otherwise see the same opportunities. Sometimes the 2% economic growth, rather than the 2.5% growth, is a price worth paying for a slightly less/more un/fair, slightly less/more un/equal society. When people attack the trickle down affect its usually done from the perspective of “people matter” and not “being the fastest/slowest growing economy matters the most”. Its political which route you take.

    Why should anyone, not limited to the people of the United States, wait and be grateful for investment and pay day tomorrow when people are hungry and unable to afford food today? Even people who are working in the UK are having to choose between heating and eating. I doubt Mick Jagger or Martin Sorrel have that dilemma.

    A quote from the UK: “The Labour Party owes more to Methodism, than to Marxism.”

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    1. Jonathan Nicholson says:

      Ooops – I just want to make a correction and clarification. The abolition of slavery started created a mechanisation process in agriculture and led to labour being freed to work in the factories. It also meant that wages were lowered because of the abundant labour supply, if you weren’t discriminated against on entrance to the labour market (I’m talking about the ‘general’ wage rate, not the former slave’s wage). This obviously assumes that growth was perfectly balanced and universal, which growth wasn’t, or that all people were able to able to move and had the knowledge and access to the information to make that move. Its an historical example, but an apt one.

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    2. Yeah, looking back, I agree with some of the points you made. After writing this article, I carried out more in depth research on the topic and discovered that some of the points I made in this article didn’t really make sense! Thanks for the lengthy comment, it was really informative.

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  5. cheekos says:

    Shrey, there is false logic in your presentation. Not many unbiased economists believe in Supply-Side, Trickle Down or as Paul Ryan cites its latest iteration, Dynamic Scoring.

    As a financial advisor, with a reasonably good grounding in economics and finance, I noticed during The Great Recession (4Q07-1Q09) how many corporations barely squeaked by in their Top Line (Revenue) numbers; however, many of them still did quite well on the Bottom Line (Profits). They drastically cut expenses.

    Remember, George W. Bush had already cut taxes on the wealthy, twice by then. So, the corporate response was to out-source jobs, greater use of industrial systems and technology, lay-offs, and mandating additional hours for the fewer workers, and cutting expenses.

    Banks have added fees to many retail products, airlines charge more for either a checked bag or a carry-on, co-pays on health care (even pre-ACA) have risen, and the retail cost of many products has risen even though commodity prices have slumped. Meanwhile, back in Bill Clinton’s Administration, taxes were raised back up to the Reagan rates, 20 million jobs were created, and the economy boomed.

    Shrey, just point-out one economic study, by unbiased academics, that demonstrates the reality of
    Supply-Side ever working. Lastly, during the 1980 Primary Debates, (then) Candidate George H. W. Bush referred to Candidate Ronald Reagan’s Supply-Side ideas as “Voodoo Economics”. Nuff said!

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  6. Jordan Smith says:

    Good article. How do you think this is related to the high taxation of corporations and how they are increasingly moving outside the United States?

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  7. Excess wealth are not put into other industries but stashed overseas in tax havens to avoid being taxed. http://reconnecting-europe.boellblog.org/2016/04/12/the-panama-papers-how-money-does-not-trickle-down-but-simply-disappears/

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    1. Jordan Smith says:

      If anything that’s an argument against taxation, not trickle-down economics.

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  8. M.P. Clifton says:

    The wealthy won’t simply leave if they are taxed more. However, there is a way to tax the 1% without them leaving. The problem isn’t that they hoard money, it is that most big corporations avoid tax. This means those on the lower end are picking up the bill for them, and this is a cause of increasing inequality. The idea that economics trickles down from the wealth, is archaic and a relic from the victorian era. But socialism is also an ideology that simply won’t work anymore.

    In the long run it discourages growth in the public sector, which is vital for a healthy economy. It encourages money to filter upwards, away from those who need it most.

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  9. Michael says:

    Way to much bias in this article plus no sources or studies.

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    1. Agreed! I wrote this article a long time ago, my views have since changed 🙂

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      1. Shrey! Please reply to my e-mail

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  10. Dino says:

    Can anyone cite individuals leaving the Country because taxes were too high ? Not anecdotes but actual facts, names, details etc. Supply side economics really only works in a manufacturing based economy – which we no longer have. As Ben is stating, what would really give a shot to the economy is raising the minimum wage and perhaps offering more tax credits to certain companies to hire more people.

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