Does The Trickle-Down Economics Really Decrease The Wealth Gap?

By Junji Yang

The wealth gap in the U.S is one of the biggest problems in this country; we can see the homeless and poor people all around, and at the same time the U.S is one of the richest countries in the world. So what causes this big inequality between the rich and the rest of people in this country?

The thing is happening today in the America is that the top percent of the richest people are getting richer and richer while the rest of people’s wealth remains static, at best, or sometimes worsens. And surely, that causes not just a wealth gap but animosity on behalf of the increasing number of the poor people against the diminishing number of rich people. A common response from the wealthiest sectors of the economy has been: “It will help you guys too! If we have more money, we have to spend it, and that means the money will finally trickle down to your pockets and eventually give you all an opportunity to become rich.”

This idea, trickle-down economic and at first glance it seems a good way to grow the total wealth of the country. In an effort to try this theory out, congress decreased the taxes of the rich, which will ultimately make them richer. However, the results were not as predicted by the rich people said on the newspaper, media, and televisions, the rich got richer as they expected but the rest of people didn’t really become richer as they promised. One thing that was accomplished was that the wealth gap widened dramatically. As facts, we can see that from 2009 to 2011, the average net worth of the country’s 8 million wealthiest households surged from an estimated $2.7 million to $3.2 million, a Pew study said. For the 111 million households that make up the bottom 93 percent, average net worth plunged 4 percent, from $140,000 to an estimated $134,000.

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According to Barry Bluestone’s interview about the success of “The Gipper’s” trickle-down economics regarding socioeconomic inequality. “The wealthiest people spend maybe 30% of their income. Poor people spend 100%, working people spend 98%, so as we move money away from working families towards very wealthy families, we take more and more consumption out of the economy, means slower and slower growth, means higher and higher an extended unemployment.” He explains why, for the 4 million long-term unemployed, things are not looking any rosier. Inequality for those at the bottom persists, and as he explains, it is linked to high unemployment. In facts, from 1967 to 2010, the lowest group’s total increase in wealth over that entire period grows only $80,600 while the top richest people’s grows $667,700.

Again, we all got the idea of trickle-down economics that it is good for us all if a small amount of people earn a huge amount of money and the fair is that their wealth will trickle down to rest of us. However, it has become clear that it is just a myth. In reality, the trickle-down economics only goes the opposite way. The money is sucked up from us to the packets of the small amount of people. How is this happening?

Trickle-down economics isn’t really a thing in economics. It is a political label used to justify people. The idea is basically a corruption of supply-side economics, which again isn’t exactly what is called a “field” of economics, but whatever. If you are going to do any searching, I would use that phrase instead though.

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One of the “controversial” ideas is that cutting taxes will spur economic growth to the point that the government will collect more revenue even with the lower tax rate. I don’t know of any empirical evidence supporting it, though it seems theoretically plausible. The Laffer Curve deals with this, though most people use it in the context that raising taxes may lower tax revenue.

Most economists would agree that in general, assuming just a regular market in equilibrium, cutting taxes would increase growth and that growth is generally good. But one must differentiate between the idea of a permanent tax cut and a temporary tax cut. According to Milton Friedman’s Permanent Income Hypothesis, consumers will not respond very much to what they perceive as a temporary change in income, i.e., a temporary tax cut will do little to stimulate an economy because consumers expect the taxes to rise again and they’d eventually have to pay more taxes to make up for the deficit.

At some level of taxation, it’s obvious the Laffer curve is true. The debates are over what that level of taxation actually is. If you had 100% taxes on someone making $100,000 per year, you are not going to collect $100,000 per year and you may collect nothing. At any rate, if nothing else that guy is going to suddenly start getting a company car that’s a business expense, an expense account to ‘entertain clients’ that’s a business expense, perhaps even a company-supplied house, company freebies like a country club membership, vouchers for his kids to go to private school with, and so on. Suddenly his legal income will drop to way below what he was making in salary before, taxes collected from him will be considerably less than would have been collected before, while simultaneously what is ‘paid’ to him in the form of company benefits/business expenses increases. Whereas before you were taxing him at 40% and collecting maybe $30,000, his new income is going to show as $40,000 and you’ll get maybe $10,000 of that.

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So say for example taxes are a flat 30%, and we bring in 30 billion in government revenue out of our 100 billion dollar economy. If we drop taxes to 29% and there’s no growth, we’ll bring in 29 billion dollars, a net loss. To grow to where we were, the economy would need to grow an extra 3.44 % to 103.44 billion dollars. (.29 / 30) That’s just to keep up with where we were. To get a net benefit like people like Milton Friedman insist will happen, we would need even more growth than that.

That’s a HUGE change in growth. Undeveloped countries sometimes see annual change like that, but advanced economies like the U.S. typically see growth in the range of 1% to 3% or so. Intuitively, it should make sense that we’re already pretty efficient at what we do, it’s hard to get enormously better at it barring huge technological leaps. A tiny tax decrease (1% is pretty small) increasing growth by more than 3% would be astonishing and out of step with any growth we’ve ever seen even after far larger tax cuts. (The Bush tax cuts, for instance)

That’s why just about everyone except a few core believers acknowledge that lowering taxes does not increase government revenue. The growth that would be necessary for that statement to be true is so enormous that we’ve just never seen it.

Why do people keep pushing the idea even when they know it’s false? Because it lets them justify to the public tax decreases that are very popular with their very wealthy contributors, basically. Even if people who do their homework will call them on it, politicians can ignore those questions and repeat the false line about tax cuts increasing growth enough to reduce the deficit like it’s a mantra. Enough voters won’t or they are just can not realize their lying for it to be worthwhile because the media and politicians are keep telling them that this is the way that make their lives better which they would drastically support . (otherwise they wouldn’t do it all. the. time.)

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