Trickle-down economics is one of my favorite topics of discussion when it comes to the economy and how we structure companies and laws in the United States. Due to the recent crash in the Stock Market, I have seen memes like the one above appearing in my Facebook feed so I have decided it is a good time for me to write an article about what it is, how it functions, and my thoughts on the topic.
What is "Trickle-down Economics"
Trickle-down economics is the idea that if the government gives better tax treatment to corporations and business owners that the wealth that is accumulated at the top will "trickle-down" to the middle and lower classes in the form of more jobs and higher wages. You have probably heard politicians referring to these corporations and individuals as "job creators", talking about how all Americans will benefit when these tax breaks are put in place. The recent corporate tax cut is an example of this, even though there was a tax cut for most citizens as well. This system was largely put in place during the administration of President Ronald Regan and is often labeled in the US as "Reganomics". The theory goes, concentrate the money at the top and it will flow down to the bottom.
My Opinion: Trickle-down Economics Does Not Work
I do not believe, based on the evidence, that this system of taxation works to the benefit of all citizens in this country. My reasoning is as follows:
In this system, we are going to hypothetically lower the tax rate on a corporation like Walmart. Once this new lower tax rate kicks in, Walmart gets to keep an additional 5% more income a year that used to go to taxes. Walmart is huge, making an average of well over $10 Billion in revenue a year since 2005. At that income, Walmart retains an additional $500 Million that used to be paid to taxes.
Now the important question: will Walmart use this additional money to raise wages or hire more workers? Probably not. You see, there is no pressure for Walmart to do either of these things. Walmart is a company, they are in the business of making money. They will only raise wages or hire more workers when they absolutely have to. Large companies do not pay their workers more money or hire more workers to be in the store unless they need to be competitive with wages or need more workers for the customers that are coming in. Doing anything else would be an unnecessary use of money for the company.
So what will they do with their money? In all likelihood, they will buy back their own shares of stock to increase their value on the stock market. In 2017 they began just such a program, planning to pump over $20 Billion into their buyback program over two years while many workers at Walmart are still making only minimum wage. This money is now funneled to the shareholders. In 2018 a study was completed that estimated that 84% of all common stock is owned by the top 10% of the wealthiest individuals in America.
The money does not trickle-down, it stays at the top.
The above chart is representative of practically all data that you can find pertaining to wealth inequality in America. As you can see, if you are not in the top 6% of the wealthiest households, you are statistically on the losing side of fiscal policy.Though there was already a downward trend before the '80s and President Regan, the downward spiral for 94% of Americans has only accelerated over the past decade. The share of the American Dream is most certainly NOT reaching the middle and lower classes.
Why Different Tax Rates Matter
An idea I have been rolling around in my head for a while is how to objectively calculate what money means to a person based on their income. That is to say, can I make a formula that shows what impact to the quality of life a dollar has for a person based on their circumstances. Sadly I have not been able to create or find anything that works in this fashion but the idea is powerful none the less and easy to understand.
The average income for an American is around $50,000 a year. For anyone making that, a 50% tax rate would be an extreme burden leaving them with only $25,000. If however, you make $1,000,000 a year, a 50% tax rate still leaves you with $500,000 a year, an extravagant life for the vast majority of us. This is what I mean by the power of a dollar based on circumstances. This is why we have a graduated tax rate in America however the top level of that tax rate is constantly being attacked and reduced by those at the very top of the wealth ladder, specifically since the full introduction of trickle-down economics. With this understanding, it is easy to see how taxes disproportionately affect the lower-income brackets while being negligible in lifestyle impact for the very wealthy.
But Is It Fair?
Putting aside more Libertarian calls for no taxes whatsoever (which I do not believe to be feasible today), we now come to one of the lynchpins of the argument for keeping trickle-down, is it fair? Is it fair that someone makes $50,000 and pays 17% in taxes while someone makes $1,000,000 and pays 39% in taxes? Objectively no, someone is paying a higher portion of their salary so it is not "fair" but let me frame my argument for higher taxes on corporations and the wealthy in a different light.
Since we can clearly see that concentrating the wealth at the top does not lead to more jobs and higher pay by itself, what happens when we flip that based on 50+ years of data? If you give an extra 5% of tax money back to the person making $50,000 a year, what do you suppose will happen? Statistically speaking, they are going to spend it. Now, what does that do to the economy? More customers mean a need for more employees to service those customers. More employees mean a smaller pool of workers to choose from. More employed people cause wages to become more competitive and rise in order to hire entice people to work. Now we have the $50,000 a year person spending more money, more people employed, and employed people making more money. Which they will spend.
What happens when the bottom 96% of people spend that money? The shareholders at the top make more money and become more wealthy. Instead of the lines in the chart above separating they all go up together. It is a self-feeding system growing the wealth from the bottom up. It makes so much common sense. The only arguments I have heard against it are about "job creators" and "fairness" without context. Our current system creates winners and losers. I believe that in a bottom-up system everyone can win. This concept is explained extremely well by billionaire entrepreneur Nick Hanauer during a TED Talk that you can watch here on Youtube.
Ifs, Ands, & Buts
This is of course, all hypothetical, though based on data that has been collected over a length of years. There are outliers to every scenario. That said the data is very clear, our current system is not working for the majority of Americans and something needs to be done. Let me be clear before anyone goes hyperbolic on me: I am not calling for full socialism or communism. I am a dyed in the wool capitalist and I believe in a meritocracy where harder work and better ideas reward those who strive for greater things. I just see a system that is fundementally broken for the majority of citizens and as that becomes worse things like debt, low wages, and unemployment will drag this economy down when we could be raising everyone up.
Comments
Post a Comment