Government "Stimulus": The Real Trickledown Economics

In the media and among pundits use of the term trickledown economics is common. Reportedly first used in the 1930s by Will Rogers, the expression was prominently adopted as a pejorative description of what is more appropriately called supply side economics, by those who opposed Ronald Reagan’s 1981 tax cuts.

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The implication of the term, when used to describe Reagan’s plan, was that these cuts were designed to initially benefit wealthy businesses and high-income taxpayers who, in turn, would take the revenues from those cuts and go out and spend it (probably on yachts and private airplanes) which in turn would end up benefiting middle and lower income people (those who build airplanes and yachts). Hence, the money would “trickle-down” from the wealthy who receive the tax cuts to the rest of society. The expression is currently being used by opponents of the recent tax reform/cut plan passed by Congressional Republicans and signed into law by President Trump.

The fact is that, as a description of supply side tax policy, “trickledown economics” is completely inaccurate. Changes in a tax code that are rooted in supply side economics are about enhancing economic growth by changing incentives to work, save, and invest. Hence, all supply side tax reform plans focus on reducing tax penalties on productive activities.

Marginal tax rates on personal income are reduced in order to encourage work effort and investment in human capital while rates on capital gains, corporate and non-corporate business income, and interest and dividend income are reduced in order to ameliorate the penalties on saving, investment, and entrepreneurship. Such rate reductions increase the returns to these activities and therefore the likelihood that they will be pursued. This means greater economic growth. The idea of money being trickled down from higher income to lower income citizens does not figure into these arguments at all and has nothing to do with why supply side tax policies have consistently proven to be so successful.

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Gary Anderson 1 year ago Contributor's comment

#Keynes invented the concept of trickle up. To equate trickle down voodoo economics with Keynes is to spread hurtful disinformation.