Story at a glance
- Advocates of trickle-down economics argue that cutting taxes for the rich will benefit the poor.
- A new study found that such policies actually increase inequality.
- The findings could have consequences for big businesses and lobbyists who seek tax cuts and benefits from the federal government.
It started as a joke.
“The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover was an engineer. He knew that water trickles down. Put it uphill and let it go and it will reach the driest little spot. But he didn’t know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellows’ hands,” humorist Will Rogers wrote in a column for the St. Petersburg Times.
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The phrase stuck, and it’s become a political calling card of sorts over the years to suggest that tax cuts for businesses and the rich were for the benefit of the lower class and society as a whole. But a new paper found that this isn’t actually the case.
“Major reforms reducing taxes on the rich lead to higher income inequality,” concluded David Hope and Julian Limberg of the London School of Economics and Political Science. “In contrast, such reforms do not have any significant effect on economic growth and unemployment.”
The study found that major tax cuts for the rich increased the top 1 percent’s share of pre-tax national income by a “sizeable” amount, but don’t significantly affect other markers of economic performance, including GDP per capita and the unemployment rate.
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“This is particularly pertinent in this case, as there is a large political science literature on the power of rich voters and organised business interests to shape public policies (incl. tax policies) in their favour,” said the authors.
The concept of cutting taxes to generate more revenue was a key foundation of Reaganomics, although applied more broadly, and has been championed by members of the Republican party in the decades since. Still, many recent examples of tax cuts have been skewed towards the wealthier Americans, citing this concept of “trickle down economics.” As the country is handed over to new leadership this January, these findings could support future economic policies addressing inequality from the bottom.
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Published on Dec 17,2020