Trump thinks trickle-down economics can make America great again. Will it work?
Concerned about income inequality? Meet one of the causes.
There's one thing we learned for sure this election year: If you want to get people excited, promise to fix the economy.
Every economist and politician worth their salt have different ideas about how we can close the widening gap between the rich and the poor, and there's one tried-and-true solution that lots of them keep coming back to: trickle-down economics. But aside from being named after something that conjures up images of faucets clogged with who-knows-what, what exactly are they? And, more importantly, do they work?
To answer that question, we need to go back a few decades.
In the 1980s, Ronald Reagan became president after promising to reinvigorate the economy by cutting taxes on wealthy Americans.
Their wealth, he promised, would inspire them to spend more on their businesses, creating jobs and wealth for the people in income brackets below them. Those people would do the same, albeit with less cash to spend, and their spent wealth would "trickle down" to the poorest of the poor. The rich would benefit, and the poor would benefit from the rich. Everyone wins!
Reagan introduces his tax plan, which he never referred to as trickle-down economics, calling it "Reaganomics" or "supply-side economics" instead. Image via Reagan Library/Wikimedia Commons.
Trickle-down economics sounds like an idea that might work. Except its benefits are, to put it mildly, not exactly as advertised. Here are a few important reasons why:
1. Trickle down really trickles right back up.
Image by Heather Libby/Upworthy.
According to smart folks who studied the impact of Reagan's tax cuts, the wealth he promised would "trickle down" ended up "trickling mostly up," making income inequality worse. Between 1979 and 2005, after-tax household income rose 6% for the bottom fifth. That sounds great until you see what happened for the top fifth — an 80% increase in income. That split has become even worse since then. Income inequality has never been higher — and under a new president taxes might go lower than ever.
2. It adds a middleman who really doesn't need (or want) to be there.
This boy will probably pass on the apple to its intended recipient. A corporation? Not so much. Image via iStock.
Let's say you want to give someone near you an apple. You could either hand them the apple yourself or you could give it to someone else to eat and hope they share at least some of it with the person you wanted to give it to in the first place.
Trickle-down economics works the same way. Instead of creating a social program to help give wealth and support to lower- and middle-income people, the government instead gives tax cuts to wealthy earners. It relies on them to create the spark that will generate wealth and support for the lower classes. Which leads to the next point:
3. If wealth were to potentially trickle down, it would take a loooooong time for even an incremental gain. Like 40 years long.
A long-term study of trickle-down economics by the Harvard Kennedy School found that with trickle-down economics, it would take 40 years for the bottom 90% of the population to see a 5% rise in their income. One of the study's authors likened this approach to being "like giving people aspirin when they have cancer."
Their recommendation, instead of trying to make trickle-down economics work, was to focus on raising up the poor and middle class. According to the authors: "Widening income inequality is the defining challenge of our time."
In recent years, plenty of politicians — and some surprising other voices — have joined the chorus against trickle-down economics.
During a famous 2011 speech, President Barack Obama railed against the tax policies that created trickle-down economics.
In 2013, Pope Francis echoed Obama's concerns.
There's one guaranteed way to create an economic model that increases wealth, and it involves turning the trickle-down pyramid upside down.
A famous study by the International Monetary Fund looked at what happens when governments prioritize helping the poor. Increasing the income share of the bottom 20% of earners by just 1% would increase the GDP by nearly half a percentage point.
Doing what trickle-down economics argues for and giving a 1% increase to the top 20% of earners does the opposite and ends up decreasing the GDP. Cue the sad trombone noise.
A majority of modern economists see the flaws in trickle-down economics. There's one important person who doesn't, though.
And he's going to become president on Jan. 20.
Image via Bastiaan Slabbers/Getty Images.
President-elect Donald Trump has been clear about his plans for American taxes. Like Reagan, he wants to cut tax rates for corporations and drop the tax rate to 15% for the top 1% of earners. This kind of policy, he promises, will make America great again. For the millions of voters who cast ballots for him, that's statistically unlikely to be the case.
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