What Is Trickle Down Economics? Trickle Down Economics Definition

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Though you have most likely heard of trickle down economics, it is possible that you are not entirely certain what it means. Long held as a tenet of Conservative economic policy, trickle down economics involves a lenient tax code for the higher income individuals and corporations. By extending cuts and reductions to the wealthy and corporate entities, it is thought that these savings will trickle down through society to the lower consumer classes. The idea is that these breaks will stimulate growth in the economy when reinvested into business.

While other theories are prone to extend tax breaks mostly to the middle and lower brackets with the idea of minor financial relief for those vulnerable consumer tax payers, trickle down economics theorizes that tax cuts and breaks given to the wealthiest have the best chance of growing the economy in a major way. While many other popular theories believe that giving tax breaks to the lower classes will stimulate the economy by improving their purchasing power, “trickle down” economics supposes that the means to advance the economy are in the hands of the wealthy and the business owning class. That is to suggest that money saved by these entities could and likely would be reinvested in wages and infrastructure. Because the wealthy and the giants of industry have the most clout in terms of finance and assets, it is thought that by building up the wealthy and corporate entities, the average consumer will enjoy a rise in the standard of living over time. The idea is that financial breaks for these wealthy individuals could allow for better growth of their assets and companies, allowing for the lower classes to receive higher wages, better standards and maybe even upward mobility.

Origins

Though most people today have a pretty reasonable understanding of the general meaning behind “trickle down” economics, it is hard to assign this moniker to any single consistent policy set. With many instances of policies being referred to as “trickle down” over time, it is difficult to perfectly define it as one coherent and static approach. In fact, the term “trickle down” was largely used by its opponents and has subsequently been used to characterize a number of different but similar tax and relief plans from the 1980s to now. Most people are familiar with trickle down economics in reference to Ronald Reagan’s tax cut policies during his presidency. These policies stem from the work of Reagan economist Arthur Laffer, the creator of the “Laffer Curve,” the principle by which trickle down economics are determined and defined.

Oddly enough, the term “trickle down” has deeper historical roots than one would suppose. Though becoming prevalent in the lexicon during the Reagan years, the term actually goes back as far as the Hoover administration. Following the 1929 crash of the stock market, then President Herbert Hoover was the first to be tasked with rebuilding the economy, catching a great deal of criticism from citizens who blamed him for the Depression. According to Will Kenton at Investopedia, the first noted use of the term was by Will Rogers, legendary American comedian and entertainer. According to Kenton, Rogers used the term “trickle down” to disparage Herbert Hoover’s efforts at stimulus to deal with the Great Depression.

Different Forms

Though every form of trickle down economics works by creating either tax breaks or subsidies for the wealthy and corporate powers, the specifics of the policies can vary greatly beyond that. There are a couple of main forms of trickle down economics, supply-side and demand-side economics. Under supply side policies, breaks are achieved through tax cuts for the higher brackets, demand-side is defined by tariffs and other subsidies that help assure that business owners and corporations can afford to pay their workers and maintain corporate growth. By maintaining corporate growth, these groups contribute to the overall economic growth through special regulations. These regulations can include a tariff on competing goods from overseas, corporate subsidies and other redirections of funding. In essence, both forms have similar intentions, though one reduces the money taken in taxes and one gives money to business owners and companies.

The traditional “Ronald Reagan” version of “trickle down” follows closely with the tenets of supply side economics, giving tax breaks to the wealthy and corporations, derided by opponents as unevenly distributed and financially inadequate. In 2017, President Donald Trump put forth a tax plan reducing the corporate rate by 20%, a policy that has many characteristics of a “trickle down” scenario. Many critics of the tax plan allege that the growth from the cuts would likely be outpaced by the amount of revenue they take away.

Drawbacks

Though “trickle down” economics are intended to allow business owners to reinvest revenue and raise wages and work standards, each successive cut has its toll on the impact of this policy. According to Noah Smith at Bloomberg Business, as each tax cut lowers the rates, there is less to draw from. That is to say that if a rate is reduced by 10 percent, the new revenue figure is 10 percent less. If you were to impose another 10 percent increase later, you can only save the taxpayer 90 percent as much savings as the previous cut. Without additional rises in the tax rates at times, cuts will only reduce this tax base over time. Though the “trickle down” approach can potentially work in certain conditions and scenarios, it does not bear repetition well over the years.

Additionally, trickle down economics has seemingly failed to bring about adequate wage increases for workers. Despite the successive generational waves of upper bracket and corporate tax cuts, workers, according to the Kimberly Amedeo of the Balance, the lower 20% of society experienced a dismal 6% increase in income, while the top 20% enjoyed a lavish 80% increase between 1979 and 2005. In this way, the “trickle down” policies of Ronald Reagan and later administrations are often blamed for the dramatic rise in income inequality in that period. Regardless of its efficacy, “trickle down” economics has played a large role in American economics of the past 3 to 4 decades.

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