Trickle-down economics
Trickle-down economics refers to economic policies that disproportionately favor the upper tier of the economic spectrum, comprising wealthy individuals and large corporations. The policies are based on the idea that spending by this group will "trickle down" to those less fortunate in the form of stronger economic growth.[1] The term has been used broadly by critics of supply-side economics to refer to taxing and spending policies by governments that, intentionally or not, result in widening income inequality; it has also been used in critical references to neoliberalism.[2] However, the term does not represent any cohesive economic theory.[3]
This article is about the political term. For the marketing phenomenon, see trickle-down effect.Similar criticisms have existed since at least the 19th century, though the term "trickle-down economics" was popularized in the U.S. in reference to supply-side economics and the economic policies of Ronald Reagan.[4] Major examples of what critics have called "trickle-down economics" in the U.S. include the Reagan tax cuts,[5] the Bush tax cuts,[6] and the Tax Cuts and Jobs Act of 2017.[7] Major UK examples include Liz Truss's mini-budget tax cuts of 2022.[8] While economists who favor supply-side economics generally avoid applying the "trickle down" analogy to it and dispute the focus on tax cuts to the rich, the phrase "trickle down" has also been occasionally used by proponents of such policies.[1][9] As of 2023, studies have not shown that there is a demonstrable link between reducing tax burdens on the upper end and economic growth.[10][11][12]
Usage[edit]
Economic analyses of the effects of lowering taxes on the wealthy[edit]
Nobel laureate Joseph Stiglitz wrote in 2015 that the post-World War II evidence does not support trickle-down economics, but rather "trickle-up economics" whereby more money in the pockets of the poor or the middle benefits everyone.[31]
In a 2020 research paper, economists David Hope and Julian Limberg analyzed data spanning 50 years from 18 countries, and found that tax cuts for the rich only succeeded at increasing inequality and making the rich wealthier, with no beneficial effect on real GDP per capita or employment. According to the study, this shows that the tax cuts for the upper class did not trickle down to the broader economy.[32][33][11][34]
A 2015 IMF staff discussion note by Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka and Evridiki Tsounta
suggests that lowering taxes on the top 20% could actually reduce growth.[35][36]
Political scientists Brainard Guy Peters and Maximilian Lennart Nagel in 2020 described the 'trickle down' description of tax cuts for the wealthy and corporations stimulating economic growth that helps the less affluent as a "zombie idea", and stated that it has been the most enduring failed policy idea in American politics.[37]
Some studies suggest a link between trickle-down economics and reduced growth, and some newspapers concluded that trickle-down economics does not promote jobs or growth, and that "policy makers shouldn't worry that raising taxes on the rich ... will harm their economies".[38][39]
Broader use[edit]
While the term "trickle-down" is commonly used to refer to income benefits, it is sometimes used to refer to the idea of positive externalities arising from technological innovation or increased trade. Arthur Okun,[40] and separately William Baumol,[41] for example, have used the term to refer to the flow of the benefits of innovation, which do not accrue entirely to the "great entrepreneurs and inventors", but trickle down to the masses. And Nobel laureate economist Paul Romer used the term in reference to the impact on wealth from tariff changes.[42]
Despite a lack of practical-use evidence for the Laffer curve, it is often cited by proponents of trickle-down policy.[43][8]
In the US, Republican tax plans and policies are often labeled "trickle-down economics", including the Reagan tax cuts, the Bush tax cuts and the Tax Cuts and Jobs Act of 2017.[44] In each of the aforementioned tax reforms, taxes were cut across all income brackets, but the biggest reductions were given to the highest income earners,[45] although the Reagan Era tax reforms also introduced the earned income tax credit which has received bipartisan praise for poverty reduction and is largely why the bottom half of workers pay no federal income tax.[46] Similarly, the Tax Cuts and Jobs Act of 2017 cut taxes across all income brackets, but especially favored the wealthy.[47][48]
In the 1992 presidential election, independent candidate Ross Perot also referred to trickle-down economics as "political voodoo".[49] In the same election during a presidential town hall debate, Bill Clinton said: