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Since the senate passed the tax bill this month that's left me confused. I try to look at both sides of partisan politics rather than joining one team and hating everything about the other. Now to understand whether this tax bill (which largely cut taxes for the rich) was something good for the country or not, I need to know if trickle down actually works.

People on the Left swear it doesn't. But I'm looking for an objective, non partisan explanation of whether or not Trickle Down economics has been effective in the past. From what I understand it's been tried many times throughout history by now, as far back as the 1890s when it was called "horse and sparrow theory" according to Wikipedia, so it seems like we should have data to show whether or not it improves the economy.

Is there any record of Trickle Down Economics improving the economy?

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    There is a meta question regarding the closing of this question. Note that we already had a different meta-question which clarifies that Macroeconomics is officially in scope on Politics.SE. – Philipp Dec 6 '17 at 9:41
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    Comments deleted. Please note that comments are not for answering the question. If you would like to answer the question, please write a real answer which adheres to our quality standards. – Philipp Dec 6 '17 at 22:12
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    You should remove the "which largely cut taxes for the rich" because it is A) Not True. B) Would at least give the appearance of being objective, which is what you claim to be looking for. Quite frankly, I don't think anyone other than the 60% of people who won't have to pay income taxes after the bill passes and corporations thinks this is a good bill. Just like the unACA, it is going to decimate the middle class. So it isn't really a partisan issue. Even republicans aren't going to congratulate their congress people for doing a good job. Just proves how out of touch congress is. – Dunk Dec 7 '17 at 22:06
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    @Dunk - So 60% of people think it's a good idea? ;) – Obie 2.0 Dec 8 '17 at 11:21
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    The Laffer Curve is an important concept in this debate. It's theoretical but somewhat logical. The problem is that even if we believe in the Laffer Curve, we don't know where we sit on it. Another point that get's lost in the rhetotic is that during the Reagan administration, after slashing individual rates, the deficit ballooned. To address this, two bills were then passed during that same administration that were the largest peacetime tax increases in US history. Often the story we hear is: taxes cut -> revenues increased. – JimmyJames Dec 8 '17 at 18:22
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But I'm looking for an objective, non partisan explanation of whether or not Trickle Down economics has been effective in the past

People debate whether economics is a hard or soft science, but I think it's fair to say that even if it's a hard science, conclusions can still differ and, at the end of the day, economic policy certainly can, and often is, partisan to some degree.

All that said, there's a lot of economists that point out that trickle-down economics is not a real thing:

We find that increasing the income share of the poor and the middle class actually increases growth while a rising income share of the top 20 percent results in lower growth—that is, when the rich get richer, benefits do not trickle down.

-- International Monetary Fund

 

A recent book published by the Organization for Economic Cooperation and Development (OECD) supports the IMF study’s assertion that inequality suppresses economic growth. Both studies relied heavily on the Gini Coefficient, a measurement of income distribution in which a score of 0 represents a society in which all wealth is shared completely equally and a score of 1 a society in which all the wealth belongs to a single person (currently, the United States has a high Gini Coefficient of .4, falling only behind Chile, Mexico, and Turkey in this measurement of inequality for OECD countries.) The OECD study found that an increase in inequality on the Gini scale of two points corresponded to a 4.7% drop in GDP.

-- Organization for Economic Cooperation and Development

More recently, there was this ad-hoc survey of executives during a talk by Gary Cohn (Trump's chief economic adviser) asking if they will take money gained from corporate tax cuts and re-invest (ie, "trickle them down"). The response was, to put it bluntly, underwhelming.

And this article points out a key aspect:

Trickle-down economics, in its pure form, was never tested.

-- The Balance

That last article points out some past situations where tax cuts claiming to be 'trickle down' policies were enacted in a time where we did see economic growth, there were side effects, and several other factors, so it's impossible to say that the tax cuts did what they were promised.

As such, there is no proof that trickle-down economics works, though there is plenty of data showing that increasing the income gap isn't good for economies.

Of course, that doesn't mean the theory isn't valid...it's just that we have never (and may never) be able to validate it.

Ironically(?) if the current republican tax bill is passed into law, it may prove difficult for them to argue trickle down policy works as we currently have a growing economy. It'll be tough to show it works unless there is some level of exponential growth compared to the already upward trending current curve, and if it drops and/or the economy significantly slows, it'd put another black mark on arguments for that particular theory.

  • Comments are not for extended discussion; this conversation has been moved to chat. – Sam I am Dec 8 '17 at 22:16
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It needs to be stated that "Trickle-Down Economics" is not actually a thing. The phrase itself was coined by Democrats who opposed Reagan's tax plans in order to mock the idea of Supply Side Economics. Therefore, there is no record of Trickle-Down Economics ever having worked -- or having been even tried, because the so-named policy is a fallacious characterization of the actual policy it mocks.

Trickle-Down Economics argues that giving tax breaks to the rich will improve the lives of the middle class. This is not what Supply-Side Economics is, and to characterize the Republican tax plan as "tax breaks for the rich" follows the same flawed logic. If you want to really understand Republican thinking on tax policy, you have to dispense with the terms that the opposition party uses to ridicule their ideas and actually judge what Republicans are trying to do on its merits. In other words, you have to look at what Republicans are trying to do, not what Democrats are accusing them of trying to do.

And yes, there is plenty of evidence that Supply-Side Economics has worked in the past, but it depends on who you ask. During Reagan's term, the United States experienced higher economic growth, higher household income, greater productivity, increased tax revenues, reduced unemployment, lower interest rates, and lower inflation. It also resulted in lower personal savings and higher deficits (the latter of which is a serious problem for Republicans). The rich did get richer under Reagan, but then everyone else's income rose too. (Source)

You can criticize Supply-Side Economics if you want. There's plenty there to talk about. But "Trickle-Down Economics" is a loaded political term in the first place.


I would like to add that it would be very difficult to provide an "objective, non-partisan" analysis. As @blip noted in his answer, economics is not a hard science, and it's inherently a political topic. The political right champions economic theories like this because it fits in line with their small-government, laissez-faire worldview.

The political left tends to champion Keynesian Economics, which fits with their worldview of social justice and increased welfare spending. If you'd asked if there were any record of Keynesian Economics improving the economy, you would find an equal number of supporters and critics for that too; they would just be sitting in different chairs.

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    "trickle down" isn't a specific tax code though, and I realize that. It's just a term that refers to the idea that cutting taxes for the rich will improve the lives of the middle class. So I fail to see an issue with the term "trickle down", If senators are suggesting that cutting taxes on the rich will benefit the middle class, they're suggesting quite literally that the benefits will "trickle down". So I don't think criticizing the term itself is really warranted. The question is of whether or not there's evidence of it leading to economic growth. I upvoted this for that aspect of the answer – john doe Dec 6 '17 at 7:29
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    I feel this lacks sufficiently cited sources. The only source given is to point to Reagan, but as Regan had a number of other more significant policies, all leaning on basically increasing the deficit to cover expensive initiatives, I feel it is not a conclusive proof, a data point of one never is really.. I'd like to see more through citing of studies or additional proven examples. I'd also say the nitpicking on term 'trickle down economics' doesn't add anything to this answer, redefining an understood term because you don't like the connotation doesn't help prove or disprove things. – dsollen Dec 6 '17 at 14:44
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    This is a good answer, but I would add: The phrase "trickle-down economics", even as a simplistic political slogan to refer to a complex set of macroeconomic policies, really only refers to one element of supply-side economics (namely, the Laffer Curve). It is perfectly possible to believe that some of the supply-side reforms introduced by the Reagan (and Thatcher) administrations were successful in helping tame stagflation, while also being sceptical about whether the tax cut elements were. – Statsanalyst Dec 9 '17 at 20:30
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    I.e., I believe the Laffer Curve is valid (it obviously is, in the sense that 100% and 0% taxation will both yield nothing), but the question is where the peak of the curve is - and whether the status quo level is to the right or the left of the peak. So asking whether there have "ever" been successful examples of reduced taxes spurring economic growth isn't necessarily meaningful for assessing whether the proposed contemporary tax cuts in the US will do so. – Statsanalyst Dec 9 '17 at 20:41
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    The only source for this answer is the link to the Cato institute paper, which picks only specific economic measures across fairly short time lines. One measure is median family income, which can easily grow when the rich get richer and the poor get poorer. Some measures which are not considered by the Cato institute paper are income disparity and household wealth.The numbers that are in there are based on data available in 1996 and the chain-weighting for the GDP is based on 1992 dollars. Basically, it's not necessarily a fair or accurate comparison. And the Cato Institute is conservative. – Todd Wilcox Dec 9 '17 at 21:58
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"Trickle-down" and "supply-side" are different names for the same policy (as described by other answers: cut taxes for richest in hopes it will improve the economic growth, and cut spending to decrease the resulted deficit). Both terms are examples of framing the debated terms to get desired emotional response from the target audience.

Other examples of such framing are "death tax" vs "Estate tax" and more, see wikipedia link above.

Goal is to inject emotional response to the debate, because it is well known that emotional response influences rational arguments.

As the saying goes: "What is faster than thought? Emotion is!"

In its purest form, trickle-down/supply side economics was tried in Kansas, see:

Washington Post: Trickle-down economics is a nightmare. Kansas proved it.

  • "Sam Brownback, conducted the nation’s most radical exercise in trickle-down economics — a “real-live experiment,” he called it. He and the GOP-controlled legislature slashed the state’s already-low tax rates, eliminated state income tax for most owner-operated businesses and sharply reduced vital government services."
  • "Growth rates lagged behind those in neighboring states and the nation as a whole. Deficits mounted to unsustainable levels. Services withered. [...] finally, the legislature — still controlled by Republicans — overrode Brownback’s veto of legislation restoring taxation to sane levels."
  • "Republican leaders in Congress will probably try to ignore the Kansas fiasco or say Brownback’s implementation was flawed. But that would be unfair. All Brownback did was apply what passes for mainstream Republican orthodoxy these days: Cut taxes, eliminate regulation, shrink government, then stand back and watch as economic growth soars. It just didn’t work."
  • "business owners do not decide whether to expand capacity or add employees based solely on the tax rate they must pay. Much more important is whether there is enough demand to justify such growth. If there is not — and the Kansas economy under Brownback was woefully sluggish — then tax savings will not be put to productive use.

Mother Jones: Kansas’ Disastrous Experiment in Trickle-Down Economics Is Finally Over

  • "Kansas’ experiment in trickle-down economics is finally coming to a close. [...] the state Legislature voted overwhelmingly to override a veto from Gov. Sam Brownback and increase a slew of taxes in the state."
  • "Brownback sold his plan as a conservative economic overhaul, implementing ideas that Republicans had long clamored for. He paid for Reaganomics guru Art Laffer to help craft the plan and convince wary state lawmakers."
  • "The centerpiece of his plan was a huge reduction in the state’s income tax. [...] with the most benefits handed to the wealthy. [...] Analysts warned that such a big reduction in tax revenue would leave a crater in the state’s budget, but Brownback [...] promis[ed] that the cuts would more than pay for themselves by juicing the economy and creating jobs."
  • "But Brownback’s promised economic miracle never came to pass. [...] still a heavily Republican Legislature that voted Tuesday to rebuke trickle-down economics [...] by bumping up income taxes across the board".

To balance my links above (claimed lefty, even if I consider WaPo moderate/centrist), @Winston Ewert submitted a link from Cato institute.

Cato is well know libertarian think-tank financed by Koch brothers, so it is way to the right from the center. Cato claims something different happened in Kansas, Three Lessons from the Tax Defeat in Kansas – it is not obvious for me where is the spin, but I trust WaPo jornalist who is paid to inform more than a think-tank blogger who is paid to have opinion and agenda.

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    I didn't down vote you but I might have because what you said was little more than a nicely phrased polemic. Obviously lowering taxes can raise revenue in some circumstances; and obviously raising taxes can raise government revenue in others. And obviously too much tax can curtail business activity. You didn't address the issue at hand. – Mayo Dec 6 '17 at 23:34
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    @Mayo - Thank you. I thought that linked articles explained the failed experiment in trickle-down economy in Kansas. Economy is soft science (it is impossible to have gold standard double-blind experiment), and framing explains different names for the approach (used in two other answers). In my opinion, it is better to be aware of the inevitable bias than pretend it does not exist. – Peter M. Dec 6 '17 at 23:41
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    @PeterMasiar Answers need to stand by themselves without requiring people to follow links. Maybe you could put some exerts from the linked articles into the answer? (Within fair use of course) – Tim B Dec 7 '17 at 9:40
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    Note that despite what people seem to believe, spending was not cut in Kansas: cato.org/blog/three-lessons-tax-defeat-kansas – Winston Ewert Dec 8 '17 at 4:52
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    It seems pretty useful to note that the WaPo piece you posted is an opinion piece, with an author who wrote an article recently titled "what happens if you replace the president with a clown". I agree that you should be aware of the spin when reading Cato, but it would probably be helpful to be aware of the spin in all the news you consume instead of pretending it doesn't exist in the ones you agree with. – Paul Becotte Dec 9 '17 at 0:54
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Trickle-down economics works as a very short term solution that further degrades long-term stability of the majority for the benefit of the few.

Since most people truly don’t think about long-term stability they might find it hard to connect the fact that—for example—the stock market went up at one point, but then 3 years later nobody is in better shape.

If you are going to talk about Trickle-down economics in the modern era, you need to talk about Ronald Reagan and his Director of the Office of Management and Budget from 1981–1985, David Stockman

David Stockman championed “Reagonmics” (aka: Trickle-down economics). He resigned his position in 1985 after he was interviewed by ''The Atlantic'' for a 18,000+ (!!!) word piece titled, “The Education of David Stockman” which was incredibly glib on the topic of Reaganomics; bold emphasis is mine:

Stockman himself had been a late convert to supply-side theology, and now he was beginning to leave the church. The theory of "expectations" wasn't working. He could see that. And Stockman's institutional role as budget director forced him to look constantly at aspects of the political economy that the other supply-siders tended to dismiss. Whatever the reason, Stockman was creating some distance between himself and the supply-side purists; eventually, he would become the target of their nasty barbs. For his part, Stockman began to disparage the grand theory as a kind of convenient illusion—new rhetoric to cover old Republican doctrine.”

But the idea of making life easier for the rich—tax-wise—is not new, and as John Kenneth Galbraith points out, it can be directly traced back in U.S. history to the 1890s “horse-and-sparrow theory” of economics:

“Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: ‘If you feed the horse enough oats, some will pass through to the road for the sparrows.’”

Galbraith also states that the “horse-and-sparrow theory” can be directly connected to the “Panic of 1896” which was basically an economic depression.

David Stockman has also—more recently—being more and more vocal about how this stuff doesn’t work and how “tax breaks” are simply short-sighted delusions as seen in this interview with ''Reason TV'':

“You’re kidding yourself if you think cutting taxes is really cutting taxes. We’re simply deferring massive taxes unfairly and immorally putting huge debt burdens on future generations and that is just wrong.”

protected by Philipp Dec 6 '17 at 22:12

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