In economics and politics, the term trickle-down economics or Reaganomics is the pejorative term for the theory that taxing the wealthiest individuals in society less will in allow those individuals to invest more of their money into the economics development and create new jobs for the middle and lower class. Proponents for the theory use the term supply-side economy, considering that the idea of the middle to lower classes tangentially receiving benefits through economics policy which directly benefit the rich is somewhat insulting. The basic idea is that the recipients of the tax cuts will then be able to invest more money into infrastructure, opening more stores and companies, which will then provide more jobs as well as drive down the prices of goods.
However, in terms of economic theory, there have been no major economists who have ever supported this theory or have attempted to defend the “trickle-down” aspect of the theory. While the total of taxes that the wealthy actually pay can increase the total number of taxes that they pay, there is little to no evidence of the middle to lower classes receiving any sort of benefit from these policies: “Moreover, taxes paid specifically by ‘the rich’ were higher than before, because their incomes rose so much as the economy boomed that they paid more total taxes despite the reduced tax rate” (Sowell 2006). There is a generalized increases in the economic growth, but where the connection becomes tenuous is in its benefit for the poor (Sowell 2005).
Instead of providing indirect benefits for the middle to lower classes, these tax cuts for the wealthy have been shown to increase the rich-poor gap. The problem, though, is that it’s reductive to simply show how CEO’s salaries have increased to exorbitant levels and have a knee-jerk reaction in which these people are solely blamed for any economic problem that a country is suffering through: “To be sure, excessive corporate compensation is only a small part of income inequality in America. Most experts agree that the larger problem requires significant and smart investments in education and job training for skills required in tomorrow’s economy” (Hunt 2007).
The important thing in politics and economics is to attempt to navigate your way through any sort of knee-jerk reaction and to consider the entirety of a problem. While the increasing rich-poor gap is in fact a problem, those who benefit from it can merely point to other problems that exist as well, in an effort to deflect blame. For instance, the simple fact that the rich-poor gap is increasing on it’s own is not enough to make any changes by simply pointing out that the problem exists. What must be done is to examine why the gap has increased to the extent that it has, such as increasing executive pay and loss of jobs to cheaper foreign markets.
What was seen in the 90’s, particularly with trade agreements such as NAFTA, was that instead of increasing jobs in their own countries, corporations decided that they would turn to overseas markets to fulfill theirs demands for reduced labor costs. Reduced labor costs are of direct benefit to them, increasing profit margins, and are directly a loss to the poorer populations who are being offered the jobs that any sort of trickle-down policy would create. The sort of “laissez-faire” attitude that states that government should not intervene in an individual’s pursuit of wealth because it will directly benefit everyone is without any sort of defense in today’s modern global society.
How can anyone justifiably claim that anything is going to “trickle-down” to the masses when the supposed benefits for the lower classes, specifically in terms of economic gain through jobs, are shipped overseas because a lack of regulation allows corporations to pay foreign workers a mere fraction of what a first world worker would be paid? When “Chief executives of large American companies, for example, earn more than 10 times what they did in 1980 (Frank 2007),” it is difficult to think that any sort of extra benefits that tax-cuts that benefit the wealthy will end up in anyone’s pockets other than the wealthy.
The U.S. has the highest disproportionate executive pay in the world, which is the percentage difference between what an average worker makes versus what the executives of a company pay themselves: “The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent” (Stiglitz 2011). There is a growing backlash in European and Asian countries as the level of executive pay raises as well. With this sort of exponential increase in executive pay, it is difficult not to view the actions of these executives as coming from any place other than from a sense of entitlement.
As far as the wealthiest population receiving tax-cuts, there is an additional issue that comes along with it. Consider the psychology of a person who is being told that what is of benefit to them will ultimately lead to greater benefits to others. This encourages greed and provides a person with an excuse to continue to pursue policies which will in turn increase their wealth even more. This sort of long term profiteering and encouragement of profiteering insulates people against the realities of those facing economic hardships. If a person can say “There isn’t any problem with me taking this for myself because at some point people poorer than me will indirectly receive a benefit of me receiving this” simply encourages an entire culture of greed.
Consider the financial collapse in the U.S. and the sort of attitudes displayed by those whose policies directly led to the collapse. In short, the sort of policies that were enacted directly led to an exaggerated profit margin which was not only unsustainable in the long term but were regarded as being unsustainable in the long term. So not only did they take advantage of these predatory policies, but they knew that the sort of problems that arose would in fact arise. But what can we expect when greed is rewarded?
Reference List
Frank, R 2007, ‘In the world of wages, trickle-down theories don’t hold up’, The New York Times. Web.
Hunt, A 2007, ‘Letter from Washington: As U.S. rich-poor gap grows, so does public outcry’, The New York Times. Web.
Sowell, T 2005, Trickle-down ignorance, Capitalism Magazine. Web.
Sowell, T 2006, The trickle-down life: Preserving a vision, Capitalism Magazine. Web.
Stiglitz, J 2011, ‘Of the 1%, By the 1%, for the 1%’, Vanity Fair. Web.