This week, the International Monetary Fund (IMF) released a study that many in the media are hailing as the nail in the coffin of “trickle-down” economics.
The only problem? No serious economist in modern era supports the trickle-down theory, nor is the IMF study about it at all. Rather, the trickle-down concept remains a straw man of liberal partisans used to attack any supply-side plan to cut taxes.
Take Jared Keller’s description of trickle-down economics at Pacific Standard, for example:
At the center of Reagan’s economic doctrine was the idea that economic gains primarily benefiting the wealthy—investors, businesses, entrepreneurs, and the like—will “trickle-down” to poorer members of society, creating new opportunities for the economically disadvantaged to attain a better standard of living. Prosperity for the rich leads to prosperity for all, the logic goes, so let’s hurry up with those tax cuts already. The legacy of Reaganomics continues to shape modern debates over macroeconomic policy in the United States, from the Bush tax cuts of the mid-2000s to the deficit hawks waging war over the federal budget in Congress.
That’s all well and good, except for the fact that Reagan cut taxes for everyone. Certainly, the rich got bigger tax cuts, with the top marginal rate for the federal income tax dropping from 70 percent to 50 percent in 1981. However, the poor got a nice cut as well, with the bottom bracket dropping from 14 percent to 11 percent that same year. That’s because supply-siders like Reagan believed that low taxes benefit everyone.
Certainly wealth can trickle down in the sense that lower taxes for a business could mean more revenue to expand their production and create jobs. However, wealth also trickles up through savings and investment. After all, the savings that lower- and middle-class people put into the bank are loaned out to businesses for profit. Similarly, their retirement savings are usually in the form of investments for big business.
This is fundamentally why supply-side economists support tax cuts for everyone: so both the rich and poor will have more money to spend, save, and invest in markets, fueling the private sector’s engine of prosperity. It’s not a trickle so much as a whirlwind.
Years ago, this column challenged anybody to quote any economist outside of an insane asylum who had ever advocated this “trickle-down” theory. Some readers said that somebody said that somebody else had advocated a “trickle-down” policy. But they could never name that somebody else and quote them.
In fact, the IMF study wasn’t about trickle-down economics but rather income inequality; it only mentions the phrase twice in its 39 pages.
It’s high time that liberal partisans abandoned their trickle-down bogeyman in favor of an honest discussion about economic policy.