Trickle-Down Economics

Trickle-down is a political-economic term used to describe certain economic theories and policies. It implies that policies to help the wealthy directly will also have a positive impact on the middle and lower classes and the poor, with a trickle of the original largesse.

The intent of so-called trickle-down policies is to help the wealthy; it is fine if benefits trickle down to the poor, but the point is to help the wealthy. Hence, these theories are criticized by opponents as trickle-down; it is a negative label and one that no one would use for their own theory. The proponents of these theories and policies insist that “trickle-down” is simply not an accurate description of what is going on. They would argue, for example, that Reagan's supply-side tax cuts, an oft-cited instance of trickle-down economics, expanded the economy, benefiting all economic classes. Rather than a trickle to lower economic classes, steady economic growth occurred in which everyone significantly participated.

The supposed impact of a tax cut for a wealthy corporation is the classic example of trickle-down economics. If the government lowers taxes for a wealthy corporation, then this corporation receives immediate, direct benefits in the form of higher profits. “Trickling-down” occurs when this business then expands output and hires more workers who then receive monetary benefits in the form of wages; the tax cut dollars thus “trickle-down” to the workers in an analogy to water trickling down a series of steps to finally arrive at the bottom.

In an interesting disavowal of views that he had earlier championed, Reagan-era director of the Office of Management and Budget, David Stockman, described Reagan's supply-side policies as trickle-down. Reagan's idea was to cut tax rates significantly for wealthy individuals while also cutting the capital gains tax. The idea behind this was to increase the wealthy's incentive for investment, which would then lead to greater economic growth. Rather than a trickle ending at the lower economic classes, there would be a torrent of goods and services for everyone. Stockman, however, derided these policies, saying that the real intent was to lower the top marginal income tax rates (i.e., benefit the wealthy directly) and that pointing to whatever may trickle down to the lower income classes was only a crude attempt at justifying these essentially pro-wealthy policies.

President George W. Bush's 2003 tax cuts on investments have also been called trickle-down economics, with the majority of the savings going to those whose annual income was greater than $1 million. Similarly to Reagan, Bush justified these cuts by saying that they would boost investment spending and economic growth. Critics, however, simply saw this as a cynical effort to garner widespread support for what was essentially a pro-wealthy policy by claiming that it would benefit those at the other end of the income distribution.