Why trickle down economics does work

It says targeted tax cuts work better than general ones. It advocates cuts to corporations, capital gains, and savings taxes. It doesn't promote across-the-board tax cuts.

Instead, the tax cuts go to the wealthy. The benefits trickle down to everyone else. Both trickle-down and supply-side proponents use the Laffer Curve to prove their theories. Arthur Laffer showed how tax cuts provide a powerful multiplication effect. Over time, they create enough growth to replace the government revenue lost from the cuts.

The resulting expanded, prosperous economy provides a larger tax base. But Laffer warned that this effect works best when taxes are in the "Prohibitive Range.

If the tax rate falls below the Laffer Curve's prohibitive range, then further cuts won't stimulate economic growth enough to offset the lost revenue. During the Reagan administration, it seemed like trickle-down economics worked.

The administration's policies, known as Reaganomics, helped end the recession. Reagan cut taxes significantly. Trickle-down economics was not the only reason for the recovery, though. Reagan also increased government spending by 2. Most of the spending went to defense. Trickle-down economics, in its pure form, was never tested. It's just as likely that massive government spending ended the recession. President George W. Bush used trickle-down policies to address the recession. That ended the recession by November of that year.

That often occurs because unemployment is a lagging indicator. It takes time for companies to start hiring again, even after a recession has ended. It appeared that the tax cuts worked. In this situation, it's unclear whether tax cuts or monetary policy caused the recovery.

Already, Mr. Trump's tax cuts have lifted the fortunes of the ultra-rich, according to research from two prominent economists, Emmanuel Saez and Gabriel Zucman of the University of California at Berkeley. For the first time in a century, the richest American families paid lower taxes in than people in the middle class, the economists found. To be sure, the economy was humming along before the pandemic struck the nation in March, with an unemployment rate that was at its lowest in about half a century.

Conservative think tanks such as the American Enterprise Institute pointed to Mr. Trump's tax cuts as an engine for stronger economic growth. Yet even so, millions of American families struggled to find jobs that paid living wages, while the cost of essentials such as health care, housing and education increased at far faster rates than the typical income. Put it uphill and let it go and it will reach the driest little spot. Give it to the people at the bottom and the people at the top will have it before night, anyhow.

And when President Ford proposed a tax overhaul in , Sen. Edward M. Smetters says the idea of tax breaks for the rich eventually producing benefits to the poor has never been part of supply-side economics.

In fact, many supply-siders argue that lower taxes benefit workers more than capital owners through international capital flows. Whether this argument is right or wrong is a legitimate issue.

Semantics aside, most agree that the right kind of stimulus can be efficacious to growth. There are a number of reasons why tax cuts for high earners could theoretically make others better off, he says. The current tax bill is still a moving target, but the Penn Wharton Budget Model finds that the boost to GDP produced by the tax cuts would not be enough to pay for the tax cuts. Lower taxes will probably add to growth. There are several reasons for that.

Some of us will say it is because lower taxes encourage people to work more and maybe corporations to invest more. If the tax cuts are long lived, this will raise national income for a long time. Republicans tend to start from this point. Indeed, this was the rationale for temporary cuts under President Obama. As I said, most economists agree that each of these arguments has merit.

These tend to be higher-income individuals. For an unbiased observer, there really is very little to choose between the fiscal probity of Democrats and Republicans. I would estimate yes, maybe a little but not very much. Will it encourage investment? As a result of the widespread economic growth, the government takes in more tax revenue—so much so, that the added revenue is enough to pay for the original tax cuts for the wealthy and corporations.

American economist Arthur Laffer, an advisor to the Reagan administration, developed a bell-curve style analysis that plotted the relationship between changes in the official government tax rate and actual tax receipts. This became known as the Laffer Curve. This should mean that specific cuts in tax rates would boost total receipts by encouraging more taxable income. However, it neither shows nor proves a correlation between a reduction in top tax rates and economic benefits to low- and medium-income earners.

Trickle-down policies typically increase wealth and advantages for the already-wealthy few. Although trickle-down theorists argue that putting more money in the hands of the wealthy and corporations promotes spending and free-market capitalism, ironically, it does so with government intervention.

Questions arise such as, which industries receive subsidies and which ones don't? And, how much growth is directly attributable to trickle-down policies? Critics argue that the added benefits the wealthy receive can distort the economic structure.

Lower-income earners don't receive a tax cut adding to the growing income inequality in the country. Many economists believe that cutting taxes for the poor and working families does more for an economy because they'll spend the money since they need the extra income. A tax cut for a corporation might go to stock buybacks while wealthy earners might save the extra income instead of spending it. Neither does much for economic growth, critics argue. Critics also attest that any economic growth that's generated can't be tied back to the trickle-down policies.

Many factors drive growth, including the Federal Reserve Bank's monetary policy, such as lowering interest rates making loans cheaper. Also, trade and exports, which are sales from U.

Trickle-down theory is most closely aligned with the general principals of what is more commonly referred to as " supply-side economics ," touted for forty years as the logical underpinning of trickle-down theory. However, in December of a London School of Economics report by David Hope and Julian Limberg was released which examined five decades of tax cuts in 18 wealthy nations and found they consistently benefited the wealthy but had no meaningful effect on unemployment or economic growth".

Many Republicans use the trickle-down theory to guide their policies. But it is still very heavily debated even today. The law cut personal tax rates slightly but also personal exemptions. The personal tax cuts expire, however, in and revert to the old, higher rates.

Other critics say any economic growth from the proposal would not offset any loss of revenue from the cuts.