A Con-trick of the Wealthy

Economics can be defined in a few different ways.  It’s the study of scarcity, the study of how people use resources and respond to incentives or the study of decision-making.  It often involves topics like wealth and finance, but it’s not all about money.   

Economics is a broad discipline that helps us understand historical trends, interpret today’s headlines, and make predictions about the coming years.  Economics ranges from the very small to the very large. The study of individual decisions is called microeconomics.  The study of the economy as a whole is called macroeconomics.  A microeconomist might focus on families’ medical debt, whereas a macro-economist might focus on sovereign debt.

If one considers eating scraps from the table of the wealthy or being able to eat from your own table, is in my view a matter of understanding the concept of economics.  Nonetheless, any detailed analysis of the relevant data is often opened to countless interpretations, making decisions too fluid to be confident of most conclusions.  Consequently, economics can be used as a science to blind the poor and pacify the docile into submission.

Trickle-down economics also referred to as the trickle-down theory, is an economic theory that advocates reducing taxes on businesses and the wealthy in society as a means to stimulate business investment in the short term and benefit society at large in the long term.  It could be argued that this could only have been thought up by the rich and greedy.  

The logic is also considered to be so perverse that only a poorly educated populace could be duped by such nonsensical logic.  Nonetheless, low taxation is a no-brainer to everyone because more money at your disposal is considered better because it would obviously be better to keep the money we earn rather than giving it away at the source to the government.  Experience demonstrates that the very rich are hardly ever known to be benevolent unless there is a 'road to Damascus' moment or a payoff sometime in the future.

Trickle down economics is a term used to describe the belief that if high-income earners gain an increase in salary, then everyone in the economy will benefit as their increased income and wealth filter through to all sections in society.   The elephant in the room is that there has always been the poor and the rich.  An examination of the many different types of economic governmental schemes from the founding of the world, must ask, when and where has a fair distribution of wealth caused poverty to have ever been eradicated in the history of the world?   There also appears to be an open question as to whether there has ever been any real desire to deal the this often stated objective from both right or left of the political spectrum, of actually assisting or relieving the burden of the poor.

If the richest gain an increase in wealth, then:

• They will spend a proportion of this extra wealth
• The extra wealth will cause an increased demand for goods and services, causing higher employment and rise in wages.
• The higher wages will also cause a multiplier effect, e.g. if more chauffeurs are employed by the rich, the chauffeur will gain increased income and, in turn, they will increase spending in local businesses.
• Alternatively, the wealthy may invest their increased wealth.  If the wealth is invested in new businesses, it will create new jobs and increase incomes of those employed.
• Higher spending and investment will stimulate economic activity leading to a rise in tax revenues (higher income tax, higher VAT).
• Higher tax revenues can fund public programmes such as healthcare, education and welfare payments to the poor.

However, others criticise this belief in ‘the trickle-down effect.   In particular, the wealthy have a higher marginal propensity to save.  In recent years, wealth has been saved in off-shore accounts to avoid paying tax.

Also, some studies suggest that increased income inequality can lead to this inequality being solidified through educational opportunities, wealth accumulation and the growth of monopoly/monopsony power.  Furthermore, increased inequality may lead to lower rates of economic growth.

A recent report by the OECD found that since the start of the credit crisis in 2008, inequality has widened in many countries, however, this inequality has led to lower rates of economic growth not higher.

An OECD report suggests that inequality is responsible for lower GDP.  The OECD estimates that the UK economy would have been more than 20% bigger had the gap between rich and poor not widened since the 1980s.

An important element of the trickle-down effect is with regard to income tax cuts for the top-income earners.  It is argued that cutting income tax for the rich will not just benefit high-earners, but also everyone.  

The argument is as follows:

• If high-income earners see an increase in disposable income, they will increase their spending and this creates additional demand in the economy.   This higher level of aggregate demand creates jobs and higher wages for all workers.
• Alternatively, increased profits for firms may be reinvested into expanding output.  This again leads to higher growth, wages and incomes for all.
• Lower income taxes increase the incentive to for people to work leading to higher productivity and economic growth.

Criticisms of the trickle-down effect:

• High-income earners have a high marginal propensity to save.  Therefore, the increased disposable income from a tax cut does not filter into other sections of the economy because it is saved not spent.
• Higher incomes may be used to accumulate wealth, this wealth accumulation leads to further capital gains and income from assets, leading to even higher levels of income and wealth inequality.  The economist Thomas Piketty argues that unchecked, inequality can grow because the wealthy can keep re-investing their dividends and profit.
• Higher GDP doesn’t address the fundamental inequality of capitalist society.  Even if tax cuts did lead to higher economic growth, higher output necessarily leads to higher real incomes for all.  Low-income workers may be left behind in certain types of economic growth.  The UK recovery 2011-14 has been notable for low real income growth.
• Budget deficit.  Cutting taxes in the US led to an increase in the budget deficit. (from 2.7% of GDP in 1980 to 6% of GDP in 1983).  Although this provides a temporary fiscal boost, a budget deficit creates problems for the future economy (possibility of higher interest rates, higher taxes in the future)
• Wrong target. If you want to reduce relative poverty, it makes sense to target income tax cuts and benefits at those who need it.  Cutting taxes for the rich, in the hope some may trickle down to the poorest is a very inefficient way of working.
• Cutting taxes does not necessarily increase incentives to work (both the substitution and income effect are at work and may cancel each other out).
• It was hoped cutting income tax would encourage people to work overtime and work more hours.  But in practice, this didn’t occur.
• The wealthy can invest the extra wealth in assets, such as housing.  However, this pushes up house prices, increasing the cost of living for lower-income groups.

Ronald Reagan was closely associated with the trickle-down effect in the 1980s.  This is because, during his presidential term, he cut income tax for the high earners.  He did not sell this policy on the grounds that ‘there will be a trickle-down effect.’  However, opponents often claimed that there was a limited trickle-down effect with median wages growing very slowly, compared to wages for the top 1% of income earners, summarised Reagan’s economic policy and disdain for reducing poverty.

In 2010, the Tea Party movement rode into power during the midterm elections. They wanted to cut government spending and taxes.  As a result, Congress extended the Bush tax cuts, even for those making $250,000 or more. 

In 2017, Republican President Donald Trump proposed cutting taxes for corporations and the wealthy.   He suggested tax cuts on capital gains and dividends for everyone making less than $50,000 a year.  Trump's tax plan would reduce the corporate tax rate to 20 percent. It cut income tax rates, doubled the standard deduction, and eliminated personal exemptions.  The Tax Policy Centre found that those earning in the top 1 percent would receive a larger percent tax cut than those in lower income levels.  By 2027, it is believed that those in the lowest 20 percent income levels would pay higher taxes.

He said it would boost growth enough to make up for the debt increase.  But the Joint Committee on Taxation reported that the bill would add $1 trillion even after including the tax cut's impact on economic growth.  It wouldn't spur growth enough to offset the cuts' or loss in revenue.

Higher profit can  trickle down to everyone in society:

• If profit is invested, new jobs are created.
• If profit is saved in bonds and shares, it can help finance personal pensions.
• Corporation tax means % is paid to the government for funding social spending.
• Bill Gates and other billionaire philanthropists have given much of his wealth away to charity.

However, it depends on how profit is used.  In the past decade, US corporation profit has increased significantly, but this has not trickled down into higher real median incomes. Nonetheless, cash reserves of many IT firms have risen significantly.