New Study: 50 Years of "Trickle Down" Tax Cuts Didn't Help Workers & Made Inequality Worse

"Trickle Down Economics" is the basis of modern conservative economic theory. Since the presidency of Ronald Reagan, adherents have argued that if you give tax breaks to businesses and the rich, the benefits will eventually trickle down to everyone else. It's been the underlying rationale for decades of tax cuts that have enriched America's wealthiest individuals. The problem is that it doesn't work; it's as effective as the latest diet regimen you saw on television.

Trickle-down economics assumes that wealthy investors and company owners are the real drivers of growth in the economy. It's built on the premise that they’ll use their extra cash from tax cuts to expand businesses, hire more workers, and spur greater economic growth. All of this expansion will eventually trickle down to workers in the form of better jobs and higher salaries.

It's a nice theory, but it hasn't worked that way. Decades of trickle-down tax cuts have certainly enriched top wage earners and investors, but they didn't do much for anyone else. A new study by David Hope of the London School of Economics and Julian Limberg of King’s College London, found that such measures over the last 50 years greatly benefited wealthy individuals but did little to promote jobs or growth. They also led to greater income inequality.

Hope & Limberg Study: "We find that major reforms reducing 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."

Numerous other studies have shown that trickle-down tax cuts associated with supply-side economics simply don't work and have resulted in growing income inequality in the United States. The International Monetary Fund published a scathing rejection of the trickle-down approach, and demonstrated that when "the income share of the top 20 percent increases, then GDP growth actually declined over the medium term, suggesting that the benefits do not trickle down."

IMP Study: "First, we show why policymakers need to focus on the poor and the middle class. Earlier IMF work has shown that income inequality matters for growth and its sustainability. Our analysis suggests that the income distribution itself matters for growth as well. Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels."

What does work to stimulate economic actively and decrease income inequality? Good old "demand-side" economics, focusing more on the lower and middle classes is the answer. When they have more money they will quickly spend it on goods and services which will spur businesses to expand production and hire more workers. As demand for labor increases, so do wages.

Pacific Standard, IMF: "According to the IMF, countries looking to boost economic growth should concentrate their efforts on the lower segments of society rather than bolstering so-called "job creators" with tax breaks. The study results suggest that raising incomes for the poor and middle class yields measurable improvements to the national economy: Increasing the income share to the bottom 20 percent of citizens by a mere one percent results in a 0.38 percentage point jump in GDP growth. By contrast, increasing the income share of the top 20 percent of citizens yields a decline in GDP growth by 0.08 percentage points."

Among economists, trickle-down/supply side is more of a political theory than an economic theory. It was created to provide a theoretical basis for tax cuts, not because it reflects how the market works.

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By: Don Lam & Curated Content