Trickle-down vs. flood-down

Thomas Sowell wrote a 20-page book called “Trickle Down Theory” and “Tax Cuts for the Rich” that he is selling on Amazon for $5, but you can download it for free on his website. In it, he argues in favor of tax cuts, particularly for the wealthy, using two basic arguments, 1) that lowering tax rates will bring in more government revenues (the so-called Laffer-curve argument) and 2) that tax cuts will increase GDP (mmutilitarianism).  Mmutilitarianism is the philosophy that inequality doesn’t matter because only the production of goods and services (as GDP attempts to measure) matters. Sowell hates the idea that a tax cut for the wealthy could be justified on the basis that some benefit might trickle down to non-wealthy people because he is a mmutilitarian who thinks it is immoral to consider issues of class (inequality). For example, he says:

Repeatedly, over the years, the arguments of the proponents and opponents of tax rate reductions have been arguments about two fundamentally different things. Proponents of tax rate cuts base their arguments on anticipated changes in behavior by investors in response to reduced income tax rates. Opponents of tax cuts attribute to the proponents a desire to see higher income taxpayers have more after-tax income, so that their prosperity will somehow “trickle down” to others… [Proponents of tax-cuts for the wealthy argue that they] can change the total output of the economy, while the other side is talking about changing the direction of existing after-tax income flows among people of differing income levels at existing levels of output.

In his National Review column, Sowell has repeatedly claimed that nobody is advocating for “trickle-down” economics and he issued a challenge several times, “to name any economist, outside of an insane asylum, who had ever said any such thing. Not one example has yet been received, whether from economists or anyone else.” I’ll give him one: me. I’m in favor of trickle-down economics if the trickle is big enough and in the case of modern-day Venezuela, there are probably policies to help the wealthy that would indeed trickle down enough to be well worth doing. Another famous example is philosopher John Rawls who wanted all policies to be judged on how well they benefitted the person who was the worst off. He recognized the need for policies that benefit the richest people in society because some inequality is necessary for providing trickle-down benefits that help the poorest people. He didn’t use the term “trickle down,” but the flow of resources to the poorest was the only reason he would support policies to boost the incomes of the richest members of society.

Everyone should support a trickle-down argument if the trickle is big enough. For example, suppose we give a dollar in tax breaks to Bill Gates and he somehow could invest that dollar that would indirectly cause the income of the poor to increase by $1,000. That would be an incredible investment and even a mmulitarian like Sowell would support it even though it decreases inequality because it is an increase in GDP in this case.  However, mmutilitarians like Sowell would probably think that this is a ridiculously impossible example because they tend to think that rising inequality is good for GDP because of their mistaken belief in a strong equity-efficiency tradeoff, but trickle-up is also possible.

Another recent example of a proponent of trickle-down economics is one of Trump’s top economic advisers, Gary Cohn who said ” When you take a corporate tax rate at 35 percent and move it to 20 percent … We create wage inflation, which means the workers get paid more; the workers have more disposable income, the workers spend more.  We see the whole trickle-down through the economy, and that’s good for the economy.”

The immediate beneficiaries of a corporate tax cut are the wealthy owners of corporations:

Trump’s chief economist, Kevin Hassett also used a trickle-down argument when he said that their proposed cut in corporate taxes would “increase average household income in the United States by, very conservatively, $4,000 annually.” Hassett says that this tax break for wealthy Americans can be justified because it would also benefit the middle class.

Although National Review writers like Thomas Sowell don’t like the term, “trickle down,” it is revealing how important trickle-down economics is at the National Review because they have used the phrase in hundreds of different articles. A Google search of the site reveals 1,110 pages using the terms “‘trickle-down’ and “tax”. For example, National Review author Ryan Bourne argues in favor of lower corporate-tax rates because they will hopefully “boost worker wages”. Similarly, Steven Horwitz wrote an article that is similar to Sowel’s which Horwitz titled, “There is No Such Thing as Trickle-Down Economics” in which he argued that “There’s no economic argument that claims that policies that themselves only benefit the wealthy directly will somehow “trickle down” to the poor.” Ironically, in the same article where he said that trickle-down isn’t a valid argument, he actually made a trickle-down argument himself because it is a good argument to justify policies whose immediate beneficiaries are the wealthy. Horwitz ended his argument by saying, “improving standard of living for everyone that results from more economic freedom [such as tax cuts] will be more of a flood than a trickle.”

And if he is right that the trickle is a flood, then everyone should support trickle-down economics. The real debate is whether there really is enough trickle-down to justify the tax cuts for the wealthy.

Even better, we should focus on trickle-up economics. Let’s help the rich get richer by strengthening the middle class (and poorer) who will then be able to pay higher rents to the rich.

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Posted in Public Finance

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