“Trickle Down” Myth: Workers Are Always Paid First and Then Profits Flow Upward Later – If at All

What is the trickle down economy theory? Trickle-down economics refers to any policy in which wealthy people and corporations receive tax cuts, stimulus, or deregulation in an effort to boost growth for the entire economy. Also known as supply-side economics, trickle-down economics got its colloquial name from early twentieth-century humorist Will Rogers. The trickle-down theory is not really an economic assumption but a political concept. While most persons will confuse it with supply-side economics, there is really no concept there that fits economic values. An example of the trickle-down theory is the US bank bailouts in 2008, as well as the European Unions Common Agricultural Policy (CAP). For a policy to be termed trickle-down, it must satisfy the following:It benefits only wealthy individuals and corporations in the short-run (It is deemed to benefit the general public in the long run)During the Great Depression, American Comedian and Commentator made reference to the trickle-down economic when he used it to describe the then-President Herbert Hoovers stimulus efforts. In modern days, this term is used to attack President Ronald Reagans income tax cut. -------------------------------------------------------------------------------------------------------------------------------------------------------------- Types of Trickle-Down and their Shortcomings Trickle-down economics is displayed in two forms: supply-side and demand-side. In the former, the theory states that tax cuts for wealthy individuals and corporations would lead to more jobs and a better standard of living as these entities hold the resources required for an increase in economic growth. The demand-side, on the other hand, propose that these wealth entities need protection to continue paying employees and to increase spending. The supply side is mainly associated with tax cuts, while the demand-side is mostly associated with tariffs and subsidies. Both sides are keen on transferring wealth to those who are already wealthy, and this alters the normal economic structure of wealth acquisition and free-market which suggests that wealth is gained after providing services and not before providing services. -------------------------------------------------------------------------------------------------------------------------------------------------------------- Relationship between the Laffer Curve and Trickle-Down During the Ronald Reagan administration, advisor Arthur Laffer proposed a bell-curve style pattern analysis for drafting the relationship between the alterations in the government tax rate and the nominal tax receipts. This analysis was rather termed the Laffer Curve. The shape of the curve proposes that there is a chance that taxes might not produce maximum revenue or receipts to the government. An example would be a light tax of 0% and a heavy tax of 100%. Both of them wont benefit the economy, because at 0%, taxes will not be incurred in the nation, and at 100% businesses wont operate because there is no chance of making a profit (which is the sole aim of business establishments). Thus, this model suggests that tax cuts would help increase receipts since it encourages more taxable income. This idea from Arthur Laffer was termed trickle-down as it suggested that tax cuts will boost economic growth and returns from tax. The US marginal tax rate fell from 70 to 20 between 1980 to 1988, and total receipts moved up to $991 billion from $599 billion between 1981 to 1989 when this theory was applied. This strengthened the Laffer Curve as expected, although the theory doesnt prove any relationship between tax cuts and its benefit to average and low-income employees. -------------------------------------------------------------------------------------------------------------------------------------------------------------- Modern Day Trickle-Down Theory

The trickle-down theory has become a ground for many Republican policies. In 2017, President Donald Trump suggested cutting down corporate taxes to 20%, in order to benefit wealthy entities. His plan was to reduce both corporate and income tax rates, double deduction standards and reduce personal exemption, which refers to a sum which can be deducted for an individual and their beneficiaries before a tax is filed. Criticisms occurred on both sides of the intended policies. Some of them claimed that the top 1% would benefit much more than those in the low-income earners circle. Others, however, claimed that the economic growth from the intended policy would not alter loss of revenue from tax cuts.https://thebusinessprofessor.com/en_US/economic-analysis-monetary-policy/trickle-down-theory-definition

From Chapter 23 (“Myths About Markets”) in Thomas Sowell’s book “Basic Economics: A Common Sense Guide to the Economy“: The phrase “trickle down” often comes up in discussions of tax policies. Historically, tax revenues have in a number of instances gone up when tax rates have been reduced. But any proposal by economists or others to cut tax rates, including reducing the tax rates on higher incomes or on capital gains, can lead to accusations that those making such proposals must believe that benefits should be given to the wealthy in general or to business in particular, in order that these benefits will eventually “trickle down” to the masses of ordinary people. But no recognized economist of any school of thought has ever had any such theory or made any such proposal. It is a straw man. It cannot be found in even the most voluminous and learned histories of economic theories. -------------------------------------------------------------------------------------------------------------------------------------------------------------- What is sought by those who advocate lower rates of taxation or other reductions of government’s role in the economy is not the transfer of existing wealth to higher income earners or businesses but the creation of additional wealth when businesses are less hampered by government controls or by increasing government appropriation of that additional wealth under steeply progressive taxation laws. Whatever the merits or demerits of this view, this is the argument that is made – and which is not confronted, but evaded, by talk of a non-existent “trickle-down” theory.More fundamentally, economic processes work in the directly opposite way from that depicted by those who imagine that profits first benefit business owners and that benefits only belatedly trickle down to workers. -------------------------------------------------------------------------------------------------------------------------------------------------------------- When an investment is made, whether to build a railroad or to open a new restaurant, the first money is spent hiring people to do the work. Without that, nothing happens. Even when one person decides to operate a store or hamburger stand without employees, that person must first pay somebody to deliver the goods that are going to be sold. Money goes out first to pay expenses and then comes back as profits later – if at all. The high rate of failure of new businesses makes painfully clear that there is nothing inevitable about the money coming back. -------------------------------------------------------------------------------------------------------------------------------------------------------------- Even with successful and well-established businesses, years may elapse between the initial investment and the return of earnings. From the time when an oil company begins spending money to explore for petroleum to the time when the first gasoline resulting from that exploration comes out of a pump at a filling station, a decade may have passed. In the meantime, all sorts of employees have been paid — geologists, engineers, refinery workers, and truck drivers for example. It is only afterwards that profits begin coming in. Only then are there any capital gains to tax. The real effect of a reduction in the capital gains tax is that it opens the prospect of greater future net profits and thereby provides incentives to make current investments that create current employment,In short, the sequence of payments is directly the opposite of what is assumed by those who talk about a “trickle-down” theory. The workers must be paid first and then the profits flow upward later – if at all. https://www.aei.org/carpe-diem/thomas-sowell-on-the-trickle-down-myth-workers-are-always-paid-first-and-then-profits-flow-upward-later-if-at-all/