If there has been one constant in the American political system over the last hundred odd years it has been the Republican party’s unflinching belief in the trickle-down theory of economics and the Democratic party’s equally unflinching belief that trickle-down economics is complete horseshit. In this edition of In Theory, we will examine this economic theory for ourselves and try to figure out where the truth lies, with the Republicans, the Democrats, or somewhere in the middle.
How its supposed to work: The concept behind Trickle-down economics is a simple one. If we reduce taxes on business and the wealthy they will re-invest this newly freed up capital back into the economy where it will spur economic growth for the economy as a whole. For instance, if we give Walmart a tax cut they’ll take the money they saved and reinvest it by expanding. They could do this by opening up a new store or by branching out and carrying more product lines. This will create new jobs and the income from these new workers will be spent on products and services like food, cars, home furnishings, whatever. It will then go from vendor to vendor upping the sales for everyone and encouraging more expansion and growth. This is known as the money multiplier effect and it is essential in any economy.
How it actually works: The Democrats are right. It’s all bullshit. Not the theory itself so much. Most any capital investment in the economy is a good thing. But the fault in this theory is the assumption that the money saved will, in fact, be used as capital investment. In most instances, it is used where there is little to no money multiplier for the US economy such as stock buyback or opening factories in other countries. After receiving a major tax cut most corporations will give out some kind of minor one time bonus as a PR stunt their political benefactors can point to as a victory but these are usually a drop in the pocket compared to the lost tax revenue the community faces from letting these cuts happen in the first place. As far as wealthy individuals go most of the evidence suggest the money either heads to offshore accounts or back into the pockets of the politicians who helped them in the form of political donations.
How do we fix it? Stop giving tax cuts to the upper class. Seriously. If you want a Supply-Side economic solution then give tax-cuts directly to the middle and lower classes. They are far more likely to spend it on the goods and services that will actually create a stimulus effect in their local communities. Or instead of giving a straight-up tax cut to the rich make the kinds of investments you’re looking for one hundred percent tax deductible and create penalties for things like stashing your money offshore or stock buybacks. Or realize that the government spends most of your tax dollars on defense, infrastructure, and education which all come with serious money multipliers themselves in addition to there other substantial economic benefits.
Basically it boils down to this: Trickle-down economics sounds like it makes sense but its based on an assumption that has been proven demonstrably false over and over again during the course of the last hundred years. That doesn’t mean all supply-side economics are bad. You shouldn’t throw the baby with the bath water. Under certain economic circumstances, tax cuts can be a good thing. But only if they are concentrated on the lower end of the tax bracket. This slavish dedictaion to tax cuts for the wealthy actually robs the government of tax revenue that could be used to pay teachers, soldiers, and construction workers for whom a bigger paycheck would not only raise their standard of living but would stimulate the local economy in a way that money stored away in off-shore accounts will not.