A professor of mine likened trickle down economics to a person eating a sumptuous feast…and then throwing the tiny crums on down to the dogs.
Nice system, eh?
I’m standing with matt and jshore. In order to earn money, you need people to HAVE money to spend. Think about it-Henry Ford payed his workers way more than the normal wage so THEY could invest money back into his company.
After all, what good is having a service if no one can afford it?
Or, as one of my favorite cartoons puts it:
Where did this myth about Ford get started? Ford was having a hard time keeping workers employed in his factory. He had to hire x amount of workers each year to ensure that there were y amount of workers at any given time. A high turnover rate meant lower efficency and higher expenses for the company. To combat this he raised wages which signifigantly lowered the turnover rate.
On another note why would any company pay higher wages for the workers to invest it in their company? Why not skip the middleman and just keep the cash to themselves?
Marc
You have asked a question which has not really been addresed directly in the previous responses. If you look at the economic history of the US you can clearly see that raising the tax rates have always hurt the economy and lowering them has always helped.
In 1917 Wilson raised taxes to help pay for the war this led to the depression of 1920-1921. Harding and Coolidge lowered the tax rates and this led to roaring ecomony of the 1920’s. Hoover and Roosevelt raised taxes which led to the great depression. After WW2 taxes were cut and loopholes were extended leading to the modest growth of the 1950’s. In 1963 congress passed the tax cuts that were first introduced by Kennedy and the US economy took off. This economy was stagnated by Nixon’s tax increases and the horrible monetary policy of the 1970’s. In 1981 Reagan cut taxes and the economy boomed. In 1990 Bush raised taxes which led to the recession of 1991. In 1993 Clinton raised taxes which flattened out the recovery. In 1997 the GOP congress cut taxes leading to the booming economy of the late 1990’s.
Tax cuts have always helped the economy. The reason tax cuts for the rich help the economy most is that the rich pay the most taxes. Tax cuts for the poor help the economy a little since most of the poor pay little in taxes. Tax cuts for the middle class substantially help the economy since the middle class pays a substantial amount of taxes. Tax cuts for the rich help the economy the most because the rich pay the most taxes. What is best for the economy is to cut taxes for everybody.
That has got to be the most ridiculously simplistic model of economic cause-and-effect I have ever seen. Hoover and Roosevelt caused the Great Depression??? Given that Hoover had been in office all of, what, eight months before the stock market crash, and Roosevelt wasn’t in until 1933, it’s a bit difficult to pile the blame exclusively on them.
How did the tax rate affect oil prices in the early 70’s? What caused the stock market crash of 1989? Where did “the recovery” that Clinton flattened out in 1993 come from when Bush had just “caused” a recession in 1991? Why did it take eight years to falter (when it only took Hoover eight months to destroy a booming economy)? Certainly tax rates affect the economy, but to suggest that there is a simple inverse relationship strikes me as specious.
All you really demonstrate is that tax cuts help individuals in the short term; I don’t see anything to suggest an overall economic benefit in your argument.
jshore
Poor people spending money maintains the current state of existence. Wealthy people spending money creates more money.
Wealthy persons consume more than poor people, so giving them more money will almost ensure more money is spent per individual but not percentagewise. They buy bigger things of comparable catagory. Their food is better, their cars are bigger, etc etc. Point to point, rich and poor people need the same products; rich people spend more on those same products, if not buying more product even then. Your logic is backward.
Money is owned. It is a commodity. By this logic we are far past the stage of private ownership of housing because in a complex and highly-interactive society like ours the person who lives in the house didn’t build it, doesn’t own the lumber yard, etc etc. By using a high degree of trade as a claim for what a person deserves we find that no one, anywhere, should be more rich than anyone else. I find that to be naive to the extreme.
I live down the street from Harvard, and a bit further from MIT. There are students there just a few years younger than me who have far more talent in their particular field than I do in mine. If anyone deserves more than me it is them. All things being equal, they can be more productive, more creative, etc etc. They deserve more than me. It isn’t about “fairness” or some other convoluted ideal of wealth-distribution…the more you actively distribute wealth the less wealth there is. The less wealth there is the less of a quantifyable incentive there is for any one person or group to offer some other person or group to do any one thing.
Do you want strong economic growth? So you want sustained growth? Or do you want a controlled economy where everyone has exactly the same chance in life (barring brain operations to equivocate intelligence, of course) and the idea of profit, wealth, and luxury are gone? If you want wealth, you get the wealthy.
Others, particularly jshore, have responded more cogently to most of what Unc has said than I could hope to. But I’d like to sneak in one point.
The rich tend much more to be citizens of the world than families around the economic median tend to be. A family making $38K each year is going to spend almost all their money domestically. Whatever someone making $380K/yr does with their money - spend, invest, whatever - chances are a much larger fraction of it will wind up in some other country.
When one is considering the effect of a particular tax cut on the economy of this country - which is, after all, the point - that’s quite germane. A dollar spent overseas does nothing for the US economy. No direct effect, no multiplier, no nothing.
You seem to be saying that a bigger tax cut is more stimulative than a smaller one. Well, sure; nobody’s arguing that.
It’s certainly true that if I pay $1000 in taxes, and you pay only $100, and our taxes are both cut to zero, my tax cut will probably stimulate the economy more than yours will. But it damned well should, because my tax cut was ten times as costly.
If everybody in the country got a $1000 tax rebate, there’s no evidence that the $2.8 billion that would go to the richest 1% of the population would stimulate the economy more than the $2.8 billion that the poorest 1% would get, and arguments that the opposite would be true have been summarized above.
The problem is, one can only go up-category but so far. And most people don’t do so as fast as their income allows, instead choosing to save more. (Not that that’s bad, but it stimulates the economy more slowly and indirectly.)
Persons who aren’t as well off generally have things they could buy that would make an immediate difference in their lives, but can’t afford. Give them money, and it will get back into circulation. The more money one has, the less true this is.
A case in point: my wife and I are making double what we were a few years ago. Despite the fact that the proportion of our income going to taxes has increased, and our mortgage and car payments have doubled (staying even as a fraction of income), our savings rate has skyrocketed, which means - you guessed it - we’re spending a substantially smaller fraction of our income than we used to.
The reason is, we’ve already bought everything that would unquestionably have a big impact on our lives. Now we more languidly contemplate whether we’d really use X if we bought it, or whether it would just gather dust in a corner. Whereas, five years ago, there was always stuff that we hadn’t bought, that we’d really use if we had it.
It’s a nice situation to be in. But I’d have to say that a tax cut for us is going to simply help us keep on being like we are, only with a bit more in the mutual fund. While a tax cut to a family as ours was, five years ago, can genuinely change their state of existence. They can buy a computer, or a more dependable car, or take an evening class, or otherwise buy something that will make an impact. (Yes, they might fritter it away, too, but so might we all.)
Whether it’s fair or not to include families like mine, or richer ones, in a tax cut, is another argument (although I happen to agree with jshore on this). But we don’t particularly need a tax cut, and it won’t stimulate the economy as much as a tax cut to families near or below the median will.
There are really two aspects of tax policy being discussed an intermingled here:
Efficiency - what kind of tax cuts are best for economic growth?
Equity - what tax cuts are “fair”?
(BTW, a third leg that also must be considered is revenue)
Any tax policy must answer both these questions. The OP seemed to be more on the point of #1, asking why a “trickle-up” theory wouldn’t be more efficient than a “trickle-down”.
The best answer I can think of has to do with incentives. The greater the disparity between tax rates between high and low incomes (i.e. very high rates for the rich and very low or zero reates for the poor), the lower the incentive to earn greater income, the lower the incentive to extricate oneself from poverty, near poverty or the like.
Now I am not saying that a tax system with high rates removes incentives to get rich or not be poor. But it is an undeniable economic “law” that the incentives would work to lessen these activity.
So this is an aspect that would tend to discourage a “trickle-up” theory in terms of efficiency. Ther are a lot of other issues here, the utility of income, minimum income standards, etc. But this singular aspect is true, that incentives to earn income (=growth) are muted the more progressive the income tax becomes.
Puddlegum,
Your reasons for depressions are contradicted here:
http://www.escape.com/~paulg53/politics/great_depression.shtml
Also, everyone should try to keep in mind that there are vastly more “poor” people than rich (mostly ignored here). If one cuts the rich taxes, they would not spend it all, obviously, as the poor would, and not on things that enable them to be more productive (car repairs, better food, for instance). But what we are really saying is that we are taking public owned and printed money from the rich and giving it to the poor to spend, or in free services. I happen to equate this modern practice with enlightenment and credit it for a bountiful economy. Not only is it the cost of doing business, it is the cost of maintaining a complex public monetary “point” system. If we went back to medieval economics, we would become like the third world. If this definition of freedom violates anyone’s morality to do this, I encourage you to change moralities, or get used to institutional poverty and working all day again just to nourish yourself. If someone would like to debate why a janitor deserves 1000 times less than his boss upstairs, fine, but let’s not kid ourselves who really works harder for it.
Well, I’m not kidding anyone 
To take this issue to the extreme, as I so often like to do to exemplify the issue at hand, we find Bill Gates and a janitor at the Microsoft building. Bill Gates, through his efforts, popularized and well-nigh enabled the idea of the household computer. The janitor mopped the floors and scrubbed the toilets.
I got cheap computers and user-friendly software out of the computer revolution. I got nothing out of the janitor.
Society benefits from the computers by quicker data processing, better error detection, cheaper file systems, networked databases, etc etc, all adding up to higher efficiency. Society benefits from the janitor by the money he spends on cigarettes and paperback novels to read on lunch break.
Society benefits from the technological market which grew up around computers. Society benefits from the janitor by, uh, well…
Bill Gates benefitted from society as much as the janitor. It is interesting to note how society benefitted from Bill Gates. He wasn’t a god, he was just a man…the same as the janitor. But who was worth more to society? Even if we imposed a 100% tax rate on his income and microsofts frofits over 100K or something, AND handed it to janitors all over the country, what sort of economic growth do we forsee here?
And finally, what sort of effort is necessary to create a company of that size from scratch? What sort of effort does it take to be a janitor?
I find the idea of trickle-up economics to be practiced fascism…we allow for a mock-up of private ownership, but the government decides how the monies are spent when that ownership actually starts becoming profitable.
The way taxes are cut is not in lump sums but in rate decreases. If you give a rich man a 100$ tax cut it will have about the same growth impact as if you gave 100$ tax cut to a poor man. But if you cut a rich man’s taxes by 10% that would be much better at growing the economy than if you cut the poor man’s taxes by 10% because the rich person pays so much more taxes already. Because of this the best arguement for cutting taxes for the poor is one of quality of life while for the rich it is to grow the economy.
My history of this century’s tax policies was obviously simplistic because it did not include monetary or trade policies, which I saw as outside the scope of the question. However it shows how fiscal policy has affected the economy of the US in this century. I do not blame Hoover for the stock market crash except as he did not come out against Hawley-Smoot or the disastrous monetary policies of that year. But he presided over 3 years of depression without doing anything to stop it.
As for the recovery that the Clinton tax hikes flattened out, the economy had been growing at over 4% when he took office and slowed to half that after the tax hikes.
ARL,
You give Bill Gates too much credit, and anyone like him. Minor point: Let’s remember that he practically stole his software from someone else and is a near monopolist. If he didn’t exist, three better such softwares could likely be in place by now by virtue of market forces that he collapsed around him, and more jobs, etc, cheaper prices, etc.
But, as for the janitor, or not, my point being was that this economy is NOT A GAME TO END THE GAME, it must continue. If we want to end the money-points game, our economy fails and declines, as the so-called third world is proof. We must CORRECT THE FACT THAT PEOPLE ABUSE THE GAME and love to hoard money and power, quash competition, because they are misanthropic or insecure or whatever, etc. They obviously take it very seriously, it is up to society to declare that we take the entire economy very seriously and not strictly them or their success. I don’t know why this is obvious to me, but I am not enamored with anyone’s success over anothers. I am only proud of society’s success at large, as we have discussed before. We need to get off the hungry parasitical wheel that someone needs to suffer to make someone else worthy of success.
Whoa… he “practically” stole software. I have problems with this since he wasn’t successfully penalized for this AFAIK. As well, the companies which he beat out fair and square before he was a “monopoly” (which ms isn’t) were IBM and Apple, and someone else I’m sure, who used even worse strong-arm tactics than MS was even charged with (forget what MS was convicted of). Apple and IBM were bastards in those days, and now they cry about MS’s tactics.
As well, I don’t agree that there would be more jobs and cheaper prices from multiple platforms. If we consider the number of computer users en todo and add more OSs and such, we don’t significantly increase the number of users. Demand for computers is rapidly approaching an inelastic phase right now. This means that if we were to increase the number of options out there we are spreading out profit among many companies, which drives salaries higher and decreases individual company profit. This drives prices higher and nobody wins. In an inelastic or near-inelastic situation it is advantageous to have oligarchial or monopoloistic control of the market, which can then offer the best prices and get the best profits.
Why? Depending on the nature of the commodity, competition can be either a blessing or a curse. In both cases, it benefits us to have it be a cutthroat game…only the companies who perform well can make it.
It is not abuse of economic power to sell your product at dirt-cheap prices, just like it isn’t abuse of political power to promote the platform which got you that power in the first place. The idea is to be stable, predictable, and honest to the people who purchase your product. This is almost impossible to do because the people who buy your product change their minds, are themselves somewhat dishonest, and so on, but the idea is there and that’s the statistically significant part.
There is little doubt that a millionaire has more economic clout and power than the 28.8K a year janitor. Why then do we feel that the feeble tax break we could give the janitors everywhere would amount to something more than the significant tax break we provide the wealthy? The wealthy are in a position to create wealth in the form of profits, the working class is in a position to simply spend their money.
jshore seems to feel that the money is going into the economy either way so the effect should be the same. I disagree. The class system will continue to work against equalization of wealth. It is merely a matter of who can more effectively utilize money.
Like the wealthy at the expense of the poor? Why is it OK to sacrifice their profit for the “greater good”? Why can’t we just leave everyone alone equally?
I don’t find anyone’s sacrifice to be required for growth.
puddleglum:
But here’s the rub: Politicians don’t just pick their new percentages out of thin air (at least, we hope they don’t). The percentages of tax cuts are calculated to give a specific amount of money back to the people. If the cuts go to the poor instead of the rich, you won’t see an equivalent cut in percentages. You would give the poor a 30% tax break, instead of a 10% break. So regardless of what happens, you are giving X amount of money back to the public, no matter how it is distributed.
ARL,
We get to make the rules, we don’t have to abide by their ideal conditions. We don’t have to print money for people to use against us. I agree with many economists (including Marx) that capitalism left untouched breaks down completely at some point. There is not a money god looking after things, and greed does not end up building a nice civilization by default. (Ideally, IMO, a company should share part of the wealth, not necessarily the government, then they get a tax break for doing so). So, if we throw up our hands regarding the economy, are we cheering or praying?
Marx was no economist.
“We” aren’t printing money for “them.” We and “them” are the same group: citizens of (insert country here).
The only thing they do is spend a greater amount of absolute dollars per capita than poor people. What they definitely do not do is spend a greater portion of their income than a poor person.
A rich person making 400 times as much money as a poor person, as I said above, isn’t purchasing anywhere near 400 times as many goods or services. Bill Gates certainly isn’t eating several million times as much food as I am.
A much greater percentage of X amount of money distributed to the poor will be spent than the same amount distributed to the rich.
What the hell may the working class be doing by spending their money other than creating wealth in the form of profits?
For that matter, isn’t it important where the profits that the wealthy are creating are? If Conrad Black invests $10 million in stocks in Tokyo, that doesn’t do much to improve the economy in Toronto.