Trickle Down Economics: Theory and Effectiveness
If 1981 hit songs like Bette Davis Eyes all of a sudden bubble to mind, it might be that Trump’s presidential race victory evokes thoughts of Republican predecessor Reagan, if you are of a specific age.
His victory is resuscitating a decades-old debate on if the supply side — derided by the Dems as the “trickle-down” — tax policy Ronald Reagan championed may boost the economy in the United States.
The theory: Reducing taxes for wealthy individuals and businesses leaves more money in their wallets, and spurs more hiring and investment, and the quicker growth produces enough tax income in order to pay for cuts. The peak tax rate underneath Ronald Reagan was cut to 28 percent from 70 percent, and deductions became increasingly generous. During his two terms, sixteen million jobs became created, and during that time, the economy increased as high as over 7% in the year 1984.
The president proposes slashing the peak individual marginal rate to 33 percent up from 40 percent — and more modest slashes for the ones who have low to moderate business incomes — as well as corporate rate to 15 percent from 35 percent. Also, the many start-ups taxed at the individual rate could pay 15 percent.
According to Trump in his first debate with Hillary, that will be a job crafter like we have not seen since Reagan. He added that it will be a great thing to witness.
Hillary Clinton scoffed, and said these types of cuts merely benefit the wealthy. She said she would call it trumped up trickle down because that precisely is what it’d be. She added, that isn’t how we increase our economy.
Or is it?
Definitely, according to Ike Brannon, Cato Institute’s senior fellow, as well as Senator McCain’s economic adviser, within his 2008 run for president.
He said if you eventually make it less expensive to invest, companies will hire and grow more individuals.
Nonsense, according to Jared Bernstein, previous VP Biden chief economist and senior fellow with the Center on Budget & Policy Priorities. Firstly, he adds that it isn’t clear that tax cuts are the situation that juiced the 1980’s economy, noting that Reagan spearheaded enormous rises in defense spending — in 1980, from over $300 billion to as high as over $400 billion in the year 1987 — that rippled around our economy.
The greater military spending and lower taxes almost tripled our national debt to over $2 trillion by the time that Ronald Reagan left presidential office, and stoked inflation fears contributing to the recession underneath the 1990-91 Bush senior presidential term.
According to Bernstein, President B. Clinton substantially increased taxes and experienced more job gains than Ronald Reagan. In the two terms that Clinton was in office, over 20 million jobs were created, and the economy increased about 3.8 percent per year, helped, partially by a technology boom turbocharging business productivity. In spite of the tax cuts for the rich, the economy declined into a recession during the term of George W. Bush.
Bernstein added that marked cuts in taxes made more sense within the Reagan age. The 70 percent peak personal tax rate was higher than the present 40 percent; therefore, the enormous decrease could’ve unleashed more pent up investment demand than Donald Trump’s plan might.
Besides, as interest rates are nearing record lows and most businesses are awash in cash, it isn’t like they do not have easy accessibility to money for capital spending, according to Bernstein. Yet, he adds, most have opted to buy back stock, as well as fatten dividends.
Chief economist with Moody’s Analytics, Mark Zandi, states that tax cuts generated stronger job growth and investment, yet those benefits generally are overstated. He adds they don’t pay for themselves through extra tax revenue, and cited the expanding national debt within the term that Reagan was president.
That does not mean slashing business taxes does not have benefits. According to Michael Porter, professor with Harvard, reducing the corporate tax rate — the highest amongst advanced economies — could make the United States more competitive as a place for multinationals.