New Study Shows That Tax Cuts for the Wealthy Don't "Trickle-Down" But Do Increase Income Inequality

New research shows that 50 years of "trickle-down" economics didn't actually do anything for the working class, but it did make the rich richer. Economists have been saying this for decades, but it has taken a bit of time to put the theory to rest.

Trickle-down economics is the theory that tax cuts for the wealthy and businesses will trickle down to everyone else. It assumes they will use their additional cash to start or expand businesses, hire more workers, and increase salaries, among other things. That then will increase growth in the economy which will further benefit the poor and middle class.

The newest research that argues that "trickle-down" doesn't work for anyone other than the rich comes from David Hope of the London School of Economics and Julian Limberg of King’s College London. Their work is titled The Economic Consequences of Major Tax Cuts for the Rich. Their study concluded:

"Our results show that…major tax cuts for the rich increase the top 1% share of pre-tax national income in the years following the reform. The magnitude of the effect is sizeable; on average, each major reform leads to a rise in top 1% share of pre-tax national income of 0.8 percentage points. The results also show that economic performance, as measured by real GDP per capita and the unemployment rate, is not significantly affected by major tax cuts for the rich. The estimated effects for these variables are statistically indistinguishable from zero."

The rich do invest some of their cash in new enterprises, but they mostly buy stuff or put it in the bank. It has a mildly stimulative effect, but substantially less than government spending on infrastructure or tax cuts directed to the middle class, essentially what Democrats like former President Obama argued for years.

Moreover, the authors of the study note the negative consequences for society in further enriching the 1%.

“Our research shows that the economic case for keeping taxes on the rich low is weak. Major tax cuts for the rich since the 1980s have increased income inequality, with all the problems that brings, without any offsetting gains in economic performance.”

Here is a good and quite fair assessment of trickle-down economics by Kimberly Amadeo that explains what the research has taught us over the last 50 years: Why Trickle-Down Economics Works in Theory But Not in Fact.

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By: Don Lam & Curated Content