"Trickle-Down Economics", "Reganomics" or "Voodoo Economics" were names given to the Regan Administration's theory on how tax cuts given to the rich could boost the economy. Motivated by the Laffer Curve in economic theory, the idea is that if you give the rich more money (by cutting their taxes) they would in turn have more money to invest - creating new jobs and more taxable income in the process. This theory was tested by the Regan Administration and is also a favorite theory of our current US administration.
Although the Laffer Curve does have some application in extreme cases (if the government is taxing you 99% it would take away your motivation to work at all), it does not hold in the way "Voodoo Economists" want to believe. Money, in general, trickles upward - from the consumer (the masses) to the producer (the elite). Common sense would tell us that if we wanted to infuse money into the ecomony that will affect all levels, we should give it to those at the bottom - it will end up in the hands of the rich anyway, because that is the normal flow of money. A new study confirms this:
Food stamps offer best stimulus - studyApparently, we should just give the poor more food stamps in order to help
everybody.
As for the actual documented impact of tax cuts, alas, they do not work as advertised (further confirming our common sense intuition.) From Wikipedia's article on the Laffer Curve:
In 2005, the Congressional Budget Office released a paper called "Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates" that casts doubt on the idea that tax cuts ultimately improve the government's fiscal situation. Unlike earlier research, the CBO paper estimates the budgetary impact of possible macroeconomic effects of tax policies, i.e., it attempts to account for how reductions in individual income tax rates might affect the overall future growth of the economy, and therefore influence future government tax revenues; and ultimately, impact deficits or surpluses. The paper's author forecasts the effects using various assumptions (e.g., people's foresight, the mobility of capital, and the ways in which the federal government might make up for a lower percentage revenue). Even in the paper's most generous estimated growth scenario, only 28% of the projected lower tax revenue would be recouped over a 10-year period after a 10% across-the-board reduction in all individual income tax rates. The paper points out that these projected shortfalls in revenue would have to be made up by federal borrowing: the paper estimates that the federal government would pay an extra $200 billion in interest over the decade covered by his analysis.
(The Cato institute disagrees with these findings, of course. What else could they do? However, until a study shows otherwise, in quantified empirical terms, we are left with this assesment.)
So don't believe the hype. The rich can afford to save extra income; the poor cannot. If you want more money circulated throughout the enitre economy, give it to the poor.
Be blessed,
Atom