Why do some believe that lower taxes for high income people is good for the economy?

In My Humble Opinion
1

Looking at these data, the top marginal tax rate through the 1950s was ~90%. It went down, but was 70% until 1980.

I’m under the impression that by-and-large those were pretty good years for the US economy. The rate has bounced around some since 1987, but for the most part it
s been on the 35%-40% range. And yet, it seems to me that those years haven’t been better years for the economy than the earlier years.

So why do some believe that lowering income taxes for the highly-paid helps the economy? I know it’s supposed to somehow “trickle down” – are there data which shows this does indeed happen?

Also, has anyone ever claimed a “trickle-up” scheme would be good for the economy? It seems to me that when spendable income goes up for lower- and middle-class people, most of that extra money gets spent, which helps the economy, no?

2

We were sold this massive lie during the Reagan years. “Trickle down” economics doesn’t now - nor has it ever - worked to any degree that makes a bit of difference in how people live. It just makes rich people richer. But for some reason, and despite all evidence to the contrary, those who follow the GOP believe that it does; not the rich people, who are laughing on their way to the bank, nor the politician who have their hands in your pockets, but the people doing all the work.

3

Without getting into the same old debate, it has been pointed out in similar threads that even with the 90% tax rates, the rich never paid that rate as so many more things were tax deductible.

Also, there were other significant differences between the 50s and 60s and later years such that comparing only the tax rates to the economic situation is a meager comparison at best.

4

How about trickle up? Give people a decent wage and they’ll spend more and the rich can get their money that way.

5

The basic idea behind “supply-side economics” and trickle down “theory” is that if more money goes to the wealthy, they will invest it wisely thus growing the economy, the effects of which will “trickle down” to the working sod in the form of more jobs, higher wages (because of a demand for workers), benevolent philanthropy, et cetera, and that revenues lost due to the lower tax rate will be offset by greater economic growth. (This is often compared in false dichotomy of just giving money to poor people who will spend it on worthless stuff like food, rent, and entertainment where all value will be wasted.) So as long as you find the right saddle point where lower taxes produce sufficient growth such that the resulting revenue is the same, like making more of a cheaper product gets higher sales. Or, as Bullwinkle would say, “Hey, Rocky! Watch me pull a rabbit out of my hat!”

In the actual reality that we occupy, even by the laughably loose standards of macroeconomics there is no data or evidence that shows the “theory” of trickle-down economics to be valid. Although associated in common memory with Reagan and his “voodoo economics” (George H.B. Bush’s words, not mine), it goes back to the late 19th century, and the term was actually a sardonic joke by satirist Will Rogers about how if the rich were allowed to accumulate all wealth, some would escape their reservoirs and “trickle down” to the poor like water before “trickling back up” to the rich again. Reagan’s spin on it was to reference the Laffer Curve which was literally a napkin sketch based upon no data whatsoever, or even scales that would let you test it against actual economic indices.

People believe that lower taxes for higher income people is good for the economy because

  1. They’ve been told so by someone they believe without question,
  2. They don’t know anything about economics, or
  3. It is a suitably vague justification to hide behind while the fleecing the public.

There is, of course, an argument that investment in research, technology development, et cetera is a public good, and thus, the acquisition of capital for these efforts is a public benefit. However, if you look at actual technological innovations and money that supports research in universities, you’ll find government funding behind nearly all of it just because no single wealthy individual or company is going to invest the modern equivalent of many billions of dollars into basic research in order to build a sufficient base of knowledge to develop actual salable products.

Wealthy individuals, of course, want to keep wealth out of the hands of middle and lower classes because if they have more money and are able to purchase more stuff, it will result in inflation which reduces the value of their holdings. Their notion of “growing the economy” is that their private wealth should increase rather than that it should “trickle down” and enrich others. A rising tide may raise all ships, but if you are a king the last thing you want is for uppity peasants to start building their own towers.

Stranger

6

The people who have all the money fund think tanks and advertising agencies and eventually propaganda outlets disguised as news agencies to spread their message to sell people on the idea why the rich being unfathomably rich is good. They’ve done an amazing job of tying conservative identity politics to the interests of the super-rich, so that the people who will fight hardest against taxing the wealthy are people that are barely scraping by making $11/hr, living in a trailer, who have no medical care. It really is a mindfuck.

7

Well, if we’re going to talk about effective tax rates from the 50s, it’s always good to look at a graph. It’s pretty clear that the differences narrowed quite a bit in 1981.

12

The successful JFK tax cuts preceded the Reagan years by two decades, to great effect.

13

Not agreeing with the Reagan theory but the correct way to look at Trickle Down is to think in terms of his the US compares to other countries, not how we compare with each other.

Trickle Down wouldn’t magically make the poor stay at an equivalent or improved position relative to the wealthy within this nation. It would (in theory) keep the poorest in the United States wealthier than the poorest in other nations.

If we frame “Trickle Down” as a theory that helping businesses to keep businessing at their best then I would probably agree with it to a small level and I would say that we could prove it from the data (behind a whole bunch of noise). If you frame it purely as a question of whether it’s good to lower the tax rate on the wealthy, that would be difficult to support.

But some of the noise in the equation are things like social instability as people see themselves becoming economically locked in from birth to a certain income level, reduced quality of management due to nepotism - probably leading to an increase in corruption, and a reduced desire to put your all in if, again, you’re locked into your class.

Another thing to note is that, almost certainly, the largest driver of rising income inequality is assortative marriage not the tax rate on the wealthy. Reducing income disparity will come more from things like raising the minimum wage than from trying to tax the wealthy.

14

Perhaps it is just me but I cannot make heads or tails lf what you are trying to say. “Trickle Down” is not a “theory that helping businesses keep businessing at their best”, e.g. encouraging market development and competition; it is literally about reducing tax rates on the wealthy under the notion that this will stimulate economic growth by some unclear mechanism, and that that the resulting benefit will disseminate down to workers in the form of more employment and higher wages. The counter-evidence to this is manifest to the extent that even advocates of supply side economics like to avoid the terms “trickle down” and “Reaganomics” like a discussion about the horrors of commercial poultry farming at Thanksgiving dinner.

Stranger

15

Reagan, as best I can tell, never said the words “trickle down” and never advocated a lone policy of tax cuts to the wealthy. I don’t believe - and you are free to Google this - that Trickle Down is an actual policy that anyone has ever advanced. To my research it is and always has been a strawman charicature of Supply Side economics. Supply Side economics - whether a good idea or not - advocates for a wider array of initiatives than just cutting the tax rate of individuals in the upper echelons of the wage scale.

So while, yes, the phrase does specifically mean “cutting the taxes of the wealthy”, discussing it when talking about Reagan and Supply Side economics is like if someone said, “What do you all think of Joe Biden’s Communist decrees?” The beginning of that conversation always has to be to say that Joe Biden’s policies may lean towards socialism in the sense of modern day capitalist nations like Sweden and Norway, but - whether those policies are well considered or not - they aren’t really communism in any truthful sense.

16

This might also be considered: annual GDP growth rate on a downward trend across several decades.

17

Why the rich think this is a good thing (some of them, anyway) is not too surprising. But why do the not rich think that cutting taxes on the rich is going to help them?
One thing is that they are sold a bill of goods about what will happen when they become rich like they dream of becoming.If you have low income a 35% tax rate would be damaging to your economic health, and it may be hard for them to see it as not that a big deal if you are making a few million bucks a year. Remember Joe the Plumber? Not even a plumber, and he supported policies that did nothing for him then, but which could have been good for him when he owned a giant business.

Of course they never use the term - the analogy of being peed on is way too obvious. The policy was cutting taxes on the rich, the trickle down part was why this would help the non-rich. Are you admitting that supply siders didn’t give a crap about anyone but the rich? I’d go with that.

18

For all y’all nasty folks who like reading:

19

Also known as “voodoo economics”.

20

The Laffer Curve is more of an idea that the amount of tax revenue for the government grows up to a point, but past that, increasing taxes actually retards the economy and results in lower tax revenue overall. So if the tax rate is such that it’s past that maximal revenue point, decreasing the tax rate will result in more tax revenue. Most representations show it as a graph of tax rate vs. tax revenue, with the resulting curve looking hemispherical.

But the trick as best as I can tell, is in determining just what the ideal tax rate for maximal revenue is. The problem is that it appears that the GOP just takes it as a given that we are far past that point already and want no tax increases, and only tax cuts. I am also inclined to think that there are probably a series of Laffer curves for different segments of the population- the tax rate that gets the most revenue from the middle class is probably very different than that of the 1% for example.

I personally haven’t seen any politicians giving any proof either way as to where our current tax rates are versus tax revenue, so it’s all just bullshit at the current time.

21

People generally do not form a theory and rigidly apply it to their detriment. They are much more likely to do what they want, then rationalize their behaviour after the fact in mellifluous language.

The rich do not want to pay high taxes and the system which works around this makes others wealthy. Some very wealthy people are individually generous and create some net economic benefits, and some are not. Giving to prestigious causes you personally support is preferable to paying it in tax.

America is a generous country where most people donate to charity, often inculcating religious values. Is this a substitute for tax? A little, but not much. However, history is cyclic.

The longest lasting government was perhaps the Roman Empire. It fell not only because of Christianity or lead poisoning, but more because of long standing animosity between the optimates and populares. The best emperors tended to drain marshes to prevent malaria, give soldiers and citizens land to farm, subsidize corn, empower local rulers, reduce taxes, act tolerantly and force the wealthy pay donations for public works. While being competent generals.

These emperors were then accused by the wealthy of “wanting to be king” for reducing the power of tax collectors and taking land from the rich to give to the middle class, which led to conflict and negative change. This happened again and again. In Rome. In Paris. In Cuba. Sure, America is different. How different?

22

What matters is not the official tax rate. It’s the effective tax rate.

If some loophole is available to the middle class, you can be certain that the rich will figure out a way to take advantage of it also. It is very difficult to write a tax law that will soak the rich, without soaking the middle class.

When you screw the middle class, inequality gets worse.

23

Better to simplify the tax code for everyone. You may not get to indulge your Robin Hood fantasies, but you are less likely to hurt the people you thought you were helping.

24

I’d suspect that the tax rate to GDP growth, under idealized conditions, would be multimodal - meaning that it could have multiple peaks and troughs. At certain levels of funding, whole new objectives become attainable and then optimized. At other places you’re overfunding your programs but still don’t have a large enough budget to become able to create your next big program.

And that, as said, would be under ideal conditions. Once you add in differences of implementation and management, those peaks and troughs will move around. Given sufficient ineptness, you could plausibly make the argument that less is always more.