The New Trickle-Down Theory of Economics

A recent New York Times opinion piece by David Leonhardt titled “The Rich Really Do Pay Lower Taxes” can best be described as an advertisement for Emmanuel Saez and Gabriel Zucman’s new book The Triumph of Injustice. Saez and Zucman are both left-leaning economics professors from the University of California-Berkley, and they’ve been propelled to the national stage because they are Elizabeth Warren’s economic advisors. They’ve crafted a few of the radical policies she is proposing, like the wealth tax. According to the Times, in their new book, they lay out a series of tax policy proposals they believe will transform and fix inequality in America.

The New Trickle-Down Theory

“Trickle-down theory,” where the rich keep their money rather than have it taxed away, and it then trickles down to the poor, is a term created by those who oppose free markets. In fact, the popularly criticized “trickle-down theory” that so many progressives like to criticize really doesn’t exist. It’s a strawman created to vilify and discredit any line of thinking that goes against theirs.

And yet these same people think it is the dutiful purpose of government to take wealth from the top of the country and redistribute it to those who are less fortunate in the crusade of making everyone more equal. Another way to look at this is to believe that the federal government will take a portion of wealth away from people who don’t need it and then trickle it down to those who want it throughout the country (despite the fact that most federal tax dollars stay in the DC metro area).

The same people who have created the myth of “trickle-down theory” to discredit the free market embrace the same philosophy they declared as flawed in order to justify government redistribution.

The Purpose of Income Taxes

The purpose of income taxes is to provide the federal government with revenues that fund it to operate.

Thomas Sowell points out that tax rates can sometimes be so high that the government would collect more revenue if they were lowered.

Prior to 1913, when the United States already stretched from coast to coast, income taxes were considered unconstitutional by the Supreme Court, and it took a constitutional amendment to make them legal. From that moment, what was first proposed as a modest tax on corporations morphed into the system we have today thanks to a government that grows faster than the ability to fund it. As of the writing of this article, the United States government is over $22 trillion dollars in debt.

Higher Tax Rates Do Not Guarantee Higher Revenues

World-renowned economist Thomas Sowell points out in his paper “‘Trickle Down Theory’ and ‘Tax Cuts For the Rich’” that tax rates can sometimes be so high that the government would collect more revenue if they were lowered because people’s behavior would change due to the changed incentives, which would lead to more economic activity, more increases in income, and more tax revenue despite the lowered tax rates. He then goes on to prove this belief with data from the Coolidge, Kennedy, and Reagan administrations, where tax rates were lowered and tax revenues overall increased as a result.

As Thomas Sowell points out in another book, Disparities and Discrimination, tax revenue is dependent on how people react to tax rates.

The Trump Tax Cuts and Revenues

This past year we have seen many progressives in politics and the media denounce the Trump tax cuts (properly called the Tax Cuts and Jobs Act) with the usual criticism that the rich aren’t paying their “fair share,” along with the “unique” complaint that working-class people got smaller refunds than in previous years. But these criticisms ignore the purpose of taxes, which is to increase revenue for the government.

More people got to keep more of their money to spend as they saw fit, while the government collected more money than before.

With America so bitterly divided by partisanship, getting a straight answer from non-biased organizations isn’t that simple. The Tax Policy Center declared that the tax cuts were a failure in 2018 because the real revenues fell short of their own predicted 2018 tax revenue estimated before the tax cuts were proposed. However, it looks like they predicted a spike in revenues for that year despite any major changes to tax policy or the economy. So even if revenues increased modestly from 2017 levels, they would still be judged as failures because they would not live up to the predicted higher-than-normal number.

But when examining the hard data of the actual revenue, these tax cuts can be viewed as successful. During the first seven months of 2019, there was a 2 percent increase in government revenue. In other words, more people and businesses got to keep more of their money to spend as they saw fit, while the government collected more money than before.

However, critics often choose to ignore this because the deficit, the difference between government spending and government revenue, continues to widen despite the increase of money into the Treasury.

Politicians Ignore Basic Math

The truth is that higher tax rates do not always lead to higher revenue.

In their book, Saez and Zucman propose a new progressive tax code that includes a 60 percent tax rate for the top income bracket, along with increases in corporate taxes and an expansion of the government by the creation of a new agency called the Public Protection Bureau, which would assist the IRS in cracking down on those tax dodgers not paying their “fair” share. The pitch to the public to sell these ideas is that they claim revenues will dramatically increase, and this new flow of money will fund new government programs like universal pre-K and Medicare for All.

The truth is that higher tax rates do not always lead to higher revenue, and even if there were an increase in revenue, with current spending producing trillion-dollar deficits, it seems like radically increasing that spending instead of reducing our debt would be a financially irresponsible idea. The United States government has a serious spending problem, and any politician who wants to radically add to it is setting up the country for long-term future problems in order to facilitate their short-term personal gains.