Why the rich always win, in terms of tax at least…
When President Trump took office in 2017, his team set out to rewrite existing and create new reforms in the ever-changing United States tax code. The goal in mind was simple enough, with a distinct promise of “The rich will not be gaining at all with this plan” (1) by lowering tax rates. The new tax policies would essentially juice the economy to the benefit of the middle-class. However, despite having produced a seemingly complicated and comprehensive 186-piece legislation, there are still no signs of the American working class receiving the pay raise that they were promised. So where did it all go wrong?
Unfortunately, the tax reform that President Trump was advocating for wasn’t entirely a unique idea: in fact, it was quite predictable. Providing the predominantly high-income individuals' tax cuts, also commonly referred to as the trickle-down theory, was an economic theory used by multiple republicans before the current president. This ‘theory’ refers to a certain economic proposition in which the taxes on businesses and wealthiest individuals to be reduced. In recent years, this supply-side economic school of thought has been ridiculed due to its disastrous results that occurred in the 1980s during the Reagan administration. During the Reagan administration, the national deficit swelled from $900 billion to $2.8 trillion (8), due to this specific policy. Unfortunately, the phrase “history repeats itself” still applies to this situation as the current President’s tax cut has only increased the deficit by another 1 trillion dollars. Thus, the critics of this tax policy question why republicans are so insistent on continuing the trickle-down economy to guide their policies.
While being a household term, overused by many, the term “trickle-down” was first humored by Will Rogers to discuss how the economic policies favored the rich. The theory involves supply-side proponents of a well renowned Laffer curve to prove how a tax cut can provide an extremely powerful multiplication effect (5). Over time, the theoretical model proved how the economy was able to create enough growth to replace government revenue that was once lost from the initial tax cuts. For a few situations, this method of tax cuts did, in fact, yield positive results. In the case of the Reagan administration, the trickle-down economic policy was the driving force that helped end the 1980 recession. However, it is also helpful to understand that this policy aided in alleviating the recession in conjunction with increased government spending. This two-part policy also helped in addressing the 2001 recession during George W. Bush’s administration.
Despite this, the policy still has a track record of increasing the United States’ deficit, and more importantly, adding to the ever existing problem of US income inequality. In 2015, the top 1% of families in the United States made more than 25 times what families in the bottom 99% make (4). This trend has escalated after the great depression and since then the rich have been getting richer, whilst the poor have been getting poorer. By taking a quick glance at income data on a state and country level, it’s easy to see the trend of inequality. While the unemployment rate remains low, the wage growth is still stagnant. The esteemed tycoon and investor Warren Buffet described the time during this policy as one where “many millions of hardworking citizens remained stuck on an economic treadmill… the tsunami of wealth didn't trickle down. It surged upward,” during an interview with CNBC (7). Buffett clearly understands the basic motions of capitalism: in order for trickle-down economics to work, the job-creators would have to forego their newfound power in the interest of their middle-class counterparts, a path that has simply not yet been taken.
After examining the U.S. economy since 1947, The Congressional Research Service (CRS), has “found no association between the top marginal income or capital gains rates and per capita growth” (6). It seems quite evident through multiple decades of trial and error that cutting taxes cannot be correlated with faster economic growth or raising living standards. Regrettably, if the Trump administration is looking to continue this methodology of tax cutting, it may, in turn, increase the deficit and have significant detrimental effects on future growth for the U.S.
References:
https://www.bloomberg.com/graphics/2018-tax-plan-consequences/
https://www.cnbc.com/2018/07/19/income-inequality-continues-to-grow-in-the-united-states.html
https://www.thebalance.com/trickle-down-economics-theory-effect-does-it-work-3305572
https://www.cnbc.com/2018/01/04/warren-buffett-on-the-failure-of-trickle-down-economics.html
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