Where’s the Trickle: The Failure of the Trickle-Down Theory

Where’s the Trickle: The Failure of the Trickle Down Theory image trickle

By its very definition a trickle is a very small stream and if we all have seen a trickle, sometimes it is so slow that occasionally it goes unnoticed. How a job, income and wealth creation strategy that is supposed to help an economy and middle class with that name is popular among ordinary people is quite interesting and even confusing. Literal definition aside the trickle-down theory has proven to be at best, unsustainable and at worse dreadfully ineffective.

The best years of trickle-down economics came under Reagan who inherited an economy in serious trouble. Some would say by virtue of his tax cuts he helped save the country and turn the economy around. Few mention however that Reagan ran an average top tax rate of 48.5% over his eight year term; five of those years saw a top tax bracket of 50%. Still it was a huge improvement over the 70% rate that those in the highest tax bracket were paying. Under Reagan capital gains tax was 28% compared to 15% today. Another key point that many nostalgic Americans forget is that under Reagan he raised taxes several times including payroll taxes. What happened next is amazing considering that trickle down was supposed to save the economy. Social security began operating at a surplus and the administration took the surplus to spend on other government programs all the while replacing the funds with IOU’s. Not all American are aware that social security has a cap on contribution for those earning roughly $100,000 per year or more. In other words a citizen making less than $100,000 per year contributes a higher percentage of his income for the program than a person making (for example) $300,000 per year since he only contributes on his 1st $100,000, the remaining $200,000 is not subject to contribution.

But did the tax breaks have the desired effect? Well the answer would be yes if all other facts are ignored. For instance government spending increased and deficits soared under Reagan, which is a huge talking point of the GOP this year. In addition to this “small government” Reagan had a much higher rate of government employees per capita than we had in 2010, when there were also temporary census workers on the books. In fact, if we were to duplicate the number of government employees per capita today, we would directly add more than 1 million jobs to the economy tomorrow.

In 2001 and again in 2003 George W Bush passed more tax breaks, primarily for wealthy Americans, reversing the policy Bill Clinton had adopted previously. Bush’s legacy is very fresh in the minds of Americans so a recap will be all that is needed. George W Bush had the worst job creation record of any President in modern history with some of the lowest top tax rates in history. In addition to this fact, he was able to take a budget surplus and turn it into a deficit in the span of just 1 year, undoing all of the work Clinton and congress took eight years to do.

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While nobody is blaming Bush for the Wall Street collapse or the housing bubble burst Americans can complain about the ability to react to these events. The deficit, two wars and Medicare part d program makes It nearly impossible to help the economy when revenue is too low.

In 2010, under heavy pressure from the GOP, President Obama extended the Bush era tax cuts in exchange for an extension of unemployment benefits for American workers. While this short term approach helped those in immediate need, it did not give the government the flexibility to provide programs or incentives that would accelerate job growth.

Today corporations are making record profits; the Dow Jones is near record highs and despite these facts, job growth remains low, proving there is little to no correlation between incomes at the top and job growth in the middle and bottom. If that were the case, based on this theory we should also be experiencing record employment numbers instead of struggling with 8%+ unemployment.

While the GOP continues to discuss the virtues of trickle down, the claims do not pass an examination of the facts. The only part of the trickle-down theory that is true is that the benefit to the middle class does come in a trickle, a very slow, barely visible trickle.

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