Trickle-Down Economics Model

A Trickle-Down Economics Model is an Economic Model which that economic benefits such as tax breaks provided to businesses and upper income households will benefit poorer members of society by improving the economy as a whole.

• AKA: Tax Cuts for The Rich.
• Example(s):
  • as referenced in a U.S. Economic Recovery Tax Act of 1981.
  • as reference in a U.S. Tax Reform Act of 1986.
  • as referred to in a U.S. Tax Cuts and Jobs Act of 2017.
  • ...
  • …
• Counter-Example(s):
  • Redistributive Economic Model.
• See: Great Depression, Supply-Side Economics.

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References

2022

• (Wikipedia, 2022) ⇒ https://en.wikipedia.org/wiki/Trickle-down_economics Retrieved:2022-1-4.
  • Trickle-down economics, was a term coined by political satirist Will Rogers, also known as the horse and sparrow theory; it is a pejorative characterization of the economic proposition that taxes on businesses and the wealthy in society should be reduced as a means to stimulate business investment in the short term and benefit society at large in the long term. In each of the aforementioned tax reforms, taxes were cut across all income brackets, but the biggest reductions were given to the highest income earners, In recent history, the term has been used by critics of supply-side economic policies, such as “Reaganomics". Whereas general supply-side theory favors lowering taxes overall, trickle-down theory more specifically advocates for a lower tax burden on the upper end of the economic spectrum. Empirical evidence shows that the proposition is regressive and has never managed to achieve all of its stated goals as described by the Reagan administration. Major examples of Republicans supporting what critics call "trickle-down economics" include the Reagan tax cuts, the Bush tax cuts and the Tax Cuts and Jobs Act of 2017. In each of the aforementioned tax reforms, taxes were cut across all income brackets, but the biggest reductions were given to the highest income earners, although the Reagan era tax reforms also introduced the earned income tax credit which has received bipartisan praise for poverty reduction and is largely why the bottom half of workers pay no federal income tax. Similarly, the Tax Cuts and Jobs Act of 2017 cut taxes across all income brackets, but especially favored the wealthy. The term "trickle-down" originated as a joke by humorist Will Rogers and today is often used to criticize economic policies that favor the wealthy or privileged while being framed as good for the average citizen. David Stockman, who as Ronald Reagan's budget director championed Reagan's tax cuts at first, later became critical of them and told journalist William Greider that "supply-side economics" is the trickle-down idea: Political opponents of the Reagan administration soon seized on this language in an effort to brand the administration as caring only about the wealthy. Some studies suggest a link between trickle-down economics and reduced growth, and some newspapers concluded that trickle-down economics does not promote jobs or growth, and that "policy makers shouldn't worry that raising taxes on the rich [...] will harm their economies".

2020

• (Hope & Limberg, 2020) ⇒ David Hope, and Julian Limberg. (2020). “The Economic Consequences of Major Tax Cuts for the Rich.” International Inequalities Institute Working Papers (55). London School of Economics and Political Science.
  • ABSTRACT: This paper uses data from 18 OECD countries over the last five decades to estimate the causal effect of major tax cuts for the rich on income inequality, economic growth, and unemployment. First, we use a new encompassing measure of taxes on the rich to identify instances of major reduction in tax progressivity. Then, we look at the causal effect of these episodes on economic outcomes by applying a nonparametric generalization of the difference-in-differences indicator that implements Mahalanobis matching in panel data analysis. We find that major reforms reducings taxes on the rich lead to higher income inequality as measured by the top 1% share of pre-tax national income. The effect remains stable in the medium term. In contrast, such reforms do not have any significant effect on economic growth and unemployment.
  • QUOTE: ... Proponents of tax cuts for the rich often argue for their beneficial effects on economic performance. In fact, this line of reasoning, focusing on efficiency gains and the reduction of behavioural distortions, was central to the arguments made for major tax reforms in the US (Auerbach and Slemrod, 1997; Bartels, 2005; Gale and Samwick, 2017). There are few empirical studies exploring the relationship between taxes on the rich and economic performance, however, and the evidence we do have is mixed. While some cross-country empirical studies find higher top marginal income tax rates and tax progressivity adversely affect economic growth (Gemmell et al., 2014; Padovano and Galli, 2002), a number of other studies find no significant association (Angelopoulos et al., 2007; Lee and Gordon, 2005; Piketty et al., 2014). ...

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