A new study from the London School of Economics says that 50 years of trickle down economics doesn’t work. What’s more, tax cuts for the wealthy only helped one group: themselves.
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Conservative lawmakers and economists have long supported trickle down economics. The basic premise of the idea is that reducing taxes for the wealthy will spur them to create additional investments. Which then would mean more jobs and would benefit more people via a trickle-down effect. The study said it didn’t.
50 years, 18 countries research
The new study, a joint effort from David Hope of the London School of Economics and Julian Limberg of King’s College London, examined 18 developed countries, including the United States, over 50 years from 1965 until 2015. It compared countries that passed tax cuts versus countries that didn’t.
The study found out that per capita gross domestic product and unemployment rates remained nearly identical after five years in both types of countries. While the economic landscapes remained the same, income levels of the rich grew much faster in countries that cut tax rates. Instead of the expected trickle-down effect, it only made the wealthy keep more of their riches. Consequently, it resulted in a bigger income gap between the wealthy and the middle class.
Weak Economic Rationale
Limberg, who is also a lecturer on public policy at King’s College, said that the theory of trickle down economics doesn’t work. “Based on our research, we would argue that the economic rationale for keeping taxes on the rich low is weak,” he said “In fact, if we look back into history, the period with the highest taxes on the rich — the postwar period — was also a period with high economic growth and low unemployment.”
As the study data only covered until 2015, it does not include data on the effects of President Donald Trump’s administration. The United States enacted a series of taxes for the rich and companies in 2017. Meanwhile, the middle class only received a moderate reduction. Limberg said that if the study includes that data, the results will likely remain the same.
The current coronavirus pandemic helped widen the inequities gap. Most lower-paid workers in retails, service and hospitality jobs lost their jobs – either temporarily or permanently. The continued shutdown of some industries contributed to America’s highest post-war unemployment rates.
Meanwhile, white-collar workers managed to dodge the worst parts. Many office workers held on to their jobs via remote setup. Stock market players made a killing this year as stocks rallied every time talks of recovery started. Most low and middle-class workers do not have investments. 80% of stocks are in the hands of the richest 10%.
Trickle down economics is a key idea of Reaganomics, the basis for economic programs by the Reagan administration during the 1980s. The term “trickle-down” itself started as a joke by humorist Will Rogers. It’s often used to decry policies that favor the wealthy but making it seem beneficial for the average worker. Meanwhile, Democrats are not in favor of the idea. With the incoming Biden administration, expect less and less support for the policy.
Earlier studies also point out that the trickle down economy doesn’t work. A Tax Justice Network paper in 2012 said that the wealth of the super-rich will not trickle down and improve the economy. Instead, the money will find its way to tax havens, maybe even negatively impacting the tax bases. Similarly, a 2015 paper by International Monetary Fund researchers arrived at the same conclusion. It said “If the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth.”
Watch the Yang Speaks video where former presidential candidate Andrew Yang explains why trickle-down economics doesn’t work:
Do you agree with the concept of trickle-down economics? Do you support the idea that reducing tax obligations for the rich will trickle down to society? Let us know what you think about this theory by sharing your comments below!