What Are the Facts About Trickle-Down Economics: Can It Deliver?

Trickle-down economics has generated significant debate among experts for many years. Politicians and economists debate whether reducing taxes for affluent individuals and corporations brings broader economic benefits. Supporters of these tax cuts believe they result in more significant investment and job creation, which fosters economic growth that benefits all people in the long run. Critics maintain that this system intensifies wealth disparity while serving the affluent class and fails to produce significant changes for middle- and lower-income individuals.

I will present three posts discussing trickle-down economics. First up, what does the data say? Examining the evidence is crucial for understanding the actual impact of trickle-down economics.

What Is Trickle-Down Economics?

Trickle-down economics proposes that lower taxes for businesses and wealthy people will boost economic growth and expand job opportunities and incomes across all socioeconomic levels. The argument is that by cutting taxes, wealthy individuals are given more significant incentives to invest their money in business ventures. Businesses grow through investment, which creates jobs and increases wages. Increased economic activity benefits all income levels. However, real-world data contradicts this theory.

The Data: Does Trickle-Down Economics Work?

Let us explore the results of significant tax reductions that adopted this methodology.

1. The Reagan Tax Cuts (1981)President Ronald Reagan's Economic Recovery Tax Act of 1981, a landmark event, reduced the top marginal income tax rate from 70% to 50% before lowering it to 28%. The corporate tax rate also significantly reduced from 46% to 34%.

What Happened?

Economic Growth: The economy expanded at an average annual GDP growth rate of 3.5%, comparable to the 3.2% growth rate of the 1970s before the cuts.

Income Inequality: According to Piketty and Saez (2003), the income distribution shifted between 1980 and 1990 so that the top 1% received 15% of income compared to 10%.

Deficit and Debt: Between 1981 and 1989, the federal deficit tripled, while the national debt increased from $997 billion to $2.85 trillion (CBO).

Wage Growth: Middle and lower-income workers saw their wages remain stagnant throughout economic growth.

Conclusion: The economy expanded, yet the wealthy profited the most while middle class wages stayed unchanged.

2. The Bush Tax Cuts (2001, 2003)

President George W. Bush's tax reductions in 2001 and 2003, another significant event, decreased the top income tax rate from 39.6 percent to 35 percent while decreasing taxes on capital gains and dividends.

What Happened?

Job Growth: The 2000s saw the weakest job creation in any post-war decade, with only 6 million jobs added compared to the 22 million jobs created during the 1990s (BLS).

Income Inequality: From 2002 until 2007, the wealthiest 1% received 65% of all income growth (CBPP).

Deficits and Debt: According to the CBO, the United States national debt expanded from $5.7 trillion in 2001 to $10.6 trillion by 2008.

Wages: The Census Bureau documented a 4% decrease in median household income from 2000 to 2007.

Conclusion: Although tax cuts failed to produce notable job growth and wage improvements for most Americans, they fueled increased income inequality and more significant deficits.

3. The Trump Tax Cuts (2017)The Tax Cuts and Jobs Act (TCJA) became law in 2017 when it decreased the corporate tax rate to 21% from 35% and lowered the highest individual tax rate to 37% from 39.6%.

What Happened?

Stock Buybacks Instead of Job Growth: In 2018, corporate tax savings led to $1.1 trillion in stock buybacks (CNBC) instead of expanding their workforce or increasing employee wages.

Limited Wage Growth: When corporate profits surged significantly, worker wages experienced minimal growth, rising by only 0.4% after accounting for inflation (BLS).

Economic Growth: Economic growth reached 2.9% in 2018 before slowing to 2.3% in 2019, although the initial rate matched pre-tax cut performance levels (BEA).

Deficit Surge: According to the CBO, the deficit expanded from $665 billion in 2017 to more than $1 trillion in 2019 without considering COVID-19-related costs.

Conclusion: Shareholders and executives received primary benefits from the TCJA while average workers experienced no significant changes in wages and job growth.

What Economists Say About Trickle-Down Economics

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Multiple research efforts have examined the economic effects of tax reductions for the wealthy regarding their influence on economic growth and employment levels. In 2020, research from the London School of Economics showed that half a century of tax reductions across 18 countries failed to stimulate GDP growth or job expansion. Still, they did lead to greater income inequality.

According to the Congressional Research Service (CRS, 2012), reducing top tax rates had no connection with economic growth or job creation but increased income inequality.

According to the National Bureau of Economic Research (NBER, 2015), tax cuts for wealthy individuals fail to produce enough revenue or economic growth to offset their cost.

In a 2020 research paper, economists David Hope and Julian Limberg used data spanning 50 years from 18 countries. They found that tax cuts for the rich increased inequality in the short and medium term, and had no significant effect on real GDP per capita or employment in the short and medium term.

Who Benefits Most from Trickle-Down Economics?

The main winners from corporate and wealthy individual tax reductions emerge from the data as follows:

High-income earners: From 1976 until now, the wealthiest 1% in the United States increased their income share from 9% to above 20% (Saez & Zucman, 2019).

Large corporations: Corporate tax reductions typically result in increased dividends and stock buybacks that enrich investors and company executives.

Wealthy heirs: Billionaires benefit from estate tax cuts by transferring more assets without paying taxes.

Middle and lower-income Americans have experienced stagnant wages and increasing living expenses, contributing to growing economic inequality.

The Alternative: Create a hybrid combination of structural and benefits in the form of Employee Owned and Bottom-Up Economics. I will present this in a future post.

Final Verdict: Does Trickle-Down Economics Work?

"The rich are always going to say that, just give us more money and we'll go out and spend more and then it will all trickle down to the rest of you. But that has not worked the last 10 years, and I hope the American public is catching on." Warren Buffett

It just ain't so!! Economic data analysis indicates that every time an administration institutes trickle-down economics, it consistently fails to produce the widespread benefits it promises. Instead, it has increased income inequality, was unable to make meaningful wage growth for the workforce, and led to higher national debt without sustainable economic growth.

Unfortunately, every time an administration implements tax reductions for corporations and affluent individuals, they have only led to stock buybacks, increased dividends to investors, and other asset planning adjustments, not broad economic prosperity. The goal of creating an economic policy that empowers and benefits all income levels does not materialize.

The Bottom Line?

The path to prosperity involves strengthening all income levels rather than flowing downward from the top. Please leave your contact information so I can notify you when I post part two.

Final note: To be fair, I searched for studies that supported trickle-down economics. Crickets.

Thanks for being here.

Blessings

"Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system." Pope Francis