Money for the Rest of Us

You’ve probably been watching the presidential debates or news outlets discuss these debates. I’m a bit late with this topic, but since economics are such a fundamental part of this election, just like in every election, it’s important to discuss.

You may have remembered this from the first round: 

So what is this “trumped up trickle-down” economic scheme and how are these two candidates going to solve our economic problems? Well let’s tackle just one policy right now.

Trickle-down economics has been a hot topic since the Reagan presidency of the 1980’s, when Democrats used the term to attack Reagan’s tax plan. And of course, how could we get through our current election cycle without talking about taxes? In a nutshell, trickle-down economics works by lowering the tax rates for those at the top of the pyramid because these people are thought to be  business owners and economy drivers. The idea is that if these business owners have to pay less in taxes, they can pass on all of that extra money to make goods and services cheaper for all other consumers. Business owners can afford to hire more workers and invest in the future of the country, helping all citizens. Essentially, their benefits trickle down to the rest of us.

Some principles of the policy are that it disproportionately benefits the wealthy over the middle class and poor. The goals of the policy however, are to boost the standards of living for all participants in the economy in the long run. Economists who support the trickle-down approach are also divided on the best way to go about it. Supply side economists believe that tax cuts for high earners are the most effective tools; providing incentives for business owners to increase the number of people they can hire, as well as the number of projects that their companies can take on. Demand side economists disagree. They support subsidiaries and tariffs. They argue that the wealthy need economic policy trenches in order to preserve their wealth so that they can continue to employ workers and grow the economy.

By definition, all policies under this economic strategy transfer wealth and advantages from all taxpayers towards an already wealthy few. In a healthy free market economy that implements trickle-down policies, those at the top can only increase their wealth after providing more valuable goods and services, but not before. This is because in order to receive these government benefits, you must qualify for them based on your high net worth or income.

So where did this plan come from? Well originally a comedian named Will Rogers coined the phrase “trickle-down economics” in a 1920’s attack on Herbert Hoover’s stimulus package, but the description appeared again during the Reagan presidency.

Below is a timeline of the tax rate on the wealthiest tax bracket since the 1960’s, as well as the presidencies that managed the rate.

tax-rates

Before Reagan got into office, tax rates were around 70% for the wealthiest bracket. Next we have to look at who got Reagan into the White House. Reagan ran as a Republican, a party which traditionally favors businesses and the wealthy. Here’s the breakdown of the voter population in the 1980 election, based on personal income.

reagan-election-stats

**Source: CBS News/ New York Times interviews with 12,782 voters as they left the polls, as reported in the New York Times, November 9, 1980, p. 28, and in further analysis.

The above table shows that those who brought in more personal income voted for Reagan. In order to represent those interests, Reagan had to come up with a way to sell a reduction in the personal income tax of the ultra wealthy to the rest of the American people; enter Arthur Laffer.

Reagan had an economic adviser named Arthur Laffer who found that the tax receipts (the money that the government takes in) is not a linear function of tax rates. In layman’s terms, if the government were to charge a tax rate of 0% and 100%, in both cases the government would receive no tax dollars. Reagan began to search for t*, a rate at which the government would receive the highest amount of tax receipts.

laffer-curve

This idea allowed Reagan to rationalize lowering tax rates for the wealthy. Unfortunately, the success of trickle-down economics has come under quite a bit of scrutiny. United for a Fair Economy has put out an article showing that there has actually been no correlation between cutting tax rates for the highest tax bracket and the four key economic indicators that the plan promises to improve. Those economic factors that are statistically independent of top tax bracket tax rates are:

  • Real GDP Growth Rate
  • Income Growth Rate
  • Wage Growth Rate
  • Unemployment Rate

Now what does this mean for us? Well, we’re in the midst of an election season so everyone’s talking taxes. 

Trump’s tax plan is built on cutting taxes for all income levels, especially those at the top of the economic pyramid. Below is a comparison of his and Clinton’s tax plan in regard to personal income (a negative percentage indicates that that portion of the economy will have to pay more taxes, while a positive percentage indicates a tax cut).

trickle-down-economics

*Numbers from the Wall Street Journal.

In a 33 pages analysis from the Tax Policy Center, it was found that Trump’s tax plan would “significantly reduce marginal tax rates on individuals and businesses, as well as increase standard deduction amounts to nearly four times current levels”. The analysis also found that his plan would also require numerous spending cuts, otherwise the country’s national debt would shoot up by about 80% of GDP by the year 2036. This amount of national debt would offset all of the incentive effects of the Trump tax cuts based on interest payments that will have to be paid by the tax payers. Us.

Oh,

and that Laffer guy who came up with the Laffer curve that allowed Reagan to sell lower income taxes for the ultra wealthy to the everyone else? He’s a recent addition to Trump’s economic policy team.

This is by no means conclusive when trying to decide which tax plan is better for the economy. Many different factors go into economic prosperity other than just tax rates for the wealthy, or even GDP growth and unemployment for that matter. It’s difficult to even gauge the role that tax policy plays in the U.S. economy as a whole. It’s hard to look at the data in the face of a compelling story or idea like that of trickle-down economics, but it’s also important to scrutinize the numbers and make sure we don’t take any wooden nickels.

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