Why Democrats Should Do More Than Discredit Trickle-Down Economics

[Frodo]

Whoever becomes our next presidential nominee should definitely make this argument:

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American Prospect

[136or142]

There are a number of points here that I'd like to further elaborate on later, but, to the degree that the major media outlets have any influence, as long as the people in them continue to take far more seriously the idea that either 'tax cuts pay for themselves' (or even 'tax cuts are inherently good for the economy' which seems to still be an ingrained belief) but laugh at the notion that 'spending increases pay for themselves,'  I'm not sure how much the mainstream ideas mentioned in that article will succeed.

I personally don't believe that either 'tax cuts are inherently good' or 'spending increases pay for themselves' (or even 'spending increases are inherently good') but I think all you have to do is see how seriously the major media outlets take the ideas of the loony ideological extremist Paul Ryan versus the way they laugh at Bernie Sanders and now Alexandria Ocasio Cortez, and casually comment how the Democratic Party is trending to the left because there are a 75 members in the House Progressive Democratic Caucus (and one in the Senate) but still consider there to be 'mainstream Republicans' even though virtually the entire Republican Party Congressional delegation is filled with loony ideological extremists like Paul Ryan.

[Amenhotep Bakari-Sellers]

Dems wanted to do the Obamacare thing first, but 2010 happened when they couldn't get to entitlement reform and raising once more the minimum wage. The key to that is regainning control of Congress; although, 2013, version of comprehensive immigration reform version is DOA in the right-wing SCOTUS.

[Free Bird]

A reminder that no economist has ever named or proposed a theory called "trickle-down theory."

[mvd10]

Wow, so he says Democrats should run on something and come up with some proposals of their own instead of just bashing the opponent? Truly brilliant! Ahead of his times! This will revolutionize American politics, never happened before!

A reminder that no economist has ever named or proposed a theory called "trickle-down theory."

Nah, but the author probably is referring to hardcore supply-side economics. The explicit goal of supply-side economics isn't to give money to the wealthy and see what happens, but since most supply-siders are mainly interested in slashing taxes on investment or cutting marginal income tax rates the end result is the same. Though some of their ideas have some merits.

[136or142]

A reminder that no economist has ever named or proposed a theory called "trickle-down theory."

A reminder that is isn't a surprise that a person proposing something would want to put it in the best light possible.

A further reminder that just because this person wants to put their proposal in the best light possible, it does not mean that anybody else has to play their game.

Those who want extremely limited government regulations, like Forbes Magazine, refer to this as 'economic freedom' but nobody who understands what they are proposing is under any obligation to use this term.

[All Along The Watchtower]

As if "Trickle-Down Economics" doesn't discredit itself.

[All Along The Watchtower]

A reminder that no economist has ever named or proposed a theory called "trickle-down theory."

Who said anything about economists?

Now, as for two-bit Republican hacks who have delusions of being economists...

[Orwell]

Trickle Down isnt an economic principle or theory you're referring to Supply Side Economics

[mileslunn]

Trickle down economics is not clear cut.  The general view is if you cut taxes for the rich, the economy will grow more and that will trickle down to the middle class and poor.  The reality is somewhat mixed since if a wealthy person uses their tax cut to start up a new business or expand one, that is good for the middle class and poor since it creates jobs.  But if they use the tax cut just to buy a bigger mansion, fancier car, or yacht that has little benefit.  Supply side economics brought out the idea of the Laffer Curve and pretty much all economist accept its existence, its more a disagreement about where the peak is.  Also when it comes to taxes on the rich and big corporations, they are highly mobile so a lot depends on what they are of your competitors.  Top rates over 70% worked fine in the 50s, 60s, and 70s when all developed countries had such top rates, but don't work today as no country has rates that high and when tried most recently in France, failed miserably. 

For the US with the elimination of the SALT, it depends on which state you are in, in terms of top tax rate.  In California, the top combined rate is 50.3% which is probably too high and lowering it would be beneficial, but in Texas where it is only 37%, you could probably raise it by 5% without causing any harm to growth.

Trickle down has diminishing returns, otherwise if taxes are excessively high, the benefits can be quite great, but when they are already low, it just causes more harm than good so the debate should be more what is the optimal level of government spending and taxes as opposed to the dogmatic idea more of one or less of one is automatically good. 

[136or142]

Trickle down economics is not clear cut.  The general view is if you cut taxes for the rich, the economy will grow more and that will trickle down to the middle class and poor.  The reality is somewhat mixed since if a wealthy person uses their tax cut to start up a new business or expand one, that is good for the middle class and poor since it creates jobs.  But if they use the tax cut just to buy a bigger mansion, fancier car, or yacht that has little benefit.  Supply side economics brought out the idea of the Laffer Curve and pretty much all economist accept its existence, its more a disagreement about where the peak is.  Also when it comes to taxes on the rich and big corporations, they are highly mobile so a lot depends on what they are of your competitors.  Top rates over 70% worked fine in the 50s, 60s, and 70s when all developed countries had such top rates, but don't work today as no country has rates that high and when tried most recently in France, failed miserably.  

For the US with the elimination of the SALT, it depends on which state you are in, in terms of top tax rate.  In California, the top combined rate is 50.3% which is probably too high and lowering it would be beneficial, but in Texas where it is only 37%, you could probably raise it by 5% without causing any harm to growth.

Trickle down has diminishing returns, otherwise if taxes are excessively high, the benefits can be quite great, but when they are already low, it just causes more harm than good so the debate should be more what is the optimal level of government spending and taxes as opposed to the dogmatic idea more of one or less of one is automatically good.  

I don't disagree with this, but I think it's important to impress on the idea that in economics (and in everything really) 'there is no such thing as a free lunch.'  In economics (and in everything really) the important thing to do is to not just look at the immediate action which is called a 'first order effect' but to look at the consequences of the action which are referred to as 'second order effects' 'third order effects' and so on.  So, what you've left out is the point that when taxes are cut, the money to finance those tax cuts has to come from somewhere.

This can be either through cutting government spending or increasing government borrowing (or a combination.)  Whether the benefits from the tax cuts exceeds the costs from these tax financing decisions is actually the correct way to look at tax cuts.  The point where the decreasing marginal benefit of the tax cuts meets the increasing marginal cost of the financing of the tax cuts is the 'correct' amount of taxation.  In economics, this is known as the 'equimarginal principle.'

Of course, in practice it's impossible to find that point precisely and in a constantly changing economy there would never be one precise point anyway.  However, the concept itself: that tax cuts bring both negatives and positives is what's important.  That is a more complete understanding of the so-called Laffer Curve.

It seems one of the overhangs of the large Reagan tax cuts were the large government budget deficits which contributed to rising inflation of the late 1980s that caused Alan Greenspan to raise interest rates that George H W Bush complained about that likely cost Bush reelection.  

Tax cuts themselves also have a separate two part component: an income effect and a substitution effect.  The 'income effect' suggests that as taxes are cut, people will substitute paid work for leisure (however an individual defines 'leisure' for themselves), meaning that tax cuts will actually contribute to people working less as they won't need to work as long to achieve the same level of income.  The 'substitution effect' suggests the opposite.  That as taxes are cut, work becomes more valuable and people will substitute leisure for work.  (Of course, as a second order effect of the tax cut, if interest rates rise and for some people these interest rate increases cost them more than they save through tax cuts, they would actually experience a net loss.)

In cutting taxes in the early 1980s, the Reagan Administration hypocritically claimed both (and was rarely called out for it.)  They argued that tax cuts would spur economic growth as people would work more, at the same time, in the spirit of 'family values' they also argued that tax cuts were the best 'social program' for families, as they would allow people to work less and spend more time together as families.