TRICKLE DOWN ECONOMICS

 

TRICKLE DOWN ECONOMICS

 

Professor Bob

 

 

 

Trickle-down economics is the derogatory term given to “supply side economics” by liberals, progressives, elitists, democrats and other lefties. Somehow this group cannot seem to get that it has been proven to work multiple times since 1960. The theory behind supply side economics can be found by putting Laffer Curve into your preferred search engine. Supply side economics advocates that there is an optimum income tax rate whereby the government will collect the most income tax revenue. If rates are raised above that point, the government will collect less tax revenue and if lowered below that point the government will collect less tax revenue. This theory bears out in practice because taxation takes place in a dynamic environment. People change their behavior as tax policy changes. If federal tax rates are increased, then taxpayers earn less taxable income by working less, deferring income, investing in investments that yield tax free income, or investing in assets like land and idle real estate because it does not generate income. (In those states that keep increasing taxes, the residents simply move to a state with lower taxes.) Additionally, the higher the tax rates the more incentive there is for people to cheat via under the table cash transactions and bartering. Basically, by increasing taxes the government entity ends up with less tax revenue and a shrinking economy. On the other hand, if rates are lowered, people will try to earn more income because they get to keep more. They are more likely to invest in the most profitable investment vehicles because they get to keep more of their income. Working more and investing in the private sector grows the economy and generates jobs. Since 1960 three major tax cuts have been implemented. The first was during the Kennedy administration where the maximum marginal income tax rate was reduced from 90% to 70%. The second was during the Reagan administration where the maximum marginal income tax rate was reduced from 70% to 50% and then from 50% to 28%. The third was during the George Bush administration which affected items such as capital gains and dividend income and reduced the Clinton’s maximum marginal tax rate from 39.6% to 35%. In all three cases the aggregate income tax revenue collected by the government increased and the economy grew. On the other side, we have the 1969 Tax Reform Act which increased taxes by trying to tax the wealthy (and is responsible for the alternative minimum tax affecting middle class taxpayers today), the 1976 Tax Act, and the Omnibus Budget Reconciliation Act of 1993. All resulted in the government collecting less taxable income and in slowing down the economy. The latter which went into effect in 1994 increased the maximum marginal tax rate from 28% to 39.6%, increased the motor fuels tax, and increased the taxable portion of social security benefits among other tax increases. The latter act was under Clinton’s watch. While he often gets credit for generating a budget surplus which is arguable and was not because of anything he did. The fact is that he was simply in the right place at the right time. Clinton inherited the most robust economy in history as a result of what is called the Reagan-Bush (really the Kemp-Roth) tax plan. His so-called surpluses were ten year projections based on a static analysis (no change in human behavior because of the change in the tax laws). The Congressional Budget Office is not permitted to consider changes in human behavior when making projections based on changes in the tax laws. When Clinton took office, his transition team recommended no change in economic or tax policy for fear that it would have a negative impact on the economy. If he had left well enough alone we could have had overwhelming economic growth. Even though Clinton inherited the most robust economy in history his tax legislation did begin to slow down the economy after it was implemented. Generally, the impact of tax legislation is not noticeable immediately. It takes several years for the impact to show up in the economy. Several years later it was clear that we were headed toward a recession (which is often blamed on the dot com bubble). So much so that in 1997 the Clinton administration signed into law the Taxpayer Relief Act of 1997 in an effort to curb the tide. It was too little, too late. Regardless of what proponents of tax increases want to argue, (1) the amount of income tax revenue collected by the government increases when income tax rates are reduced and (2) there are not enough wealthy people to solve the budget problem. Based on IRS data the so-called Bush tax cuts increased the tax burden on the wealthiest taxpayers from 35% of the total income tax revenue collected by the government to 39% while reducing the burden on lower income taxpayers. If the Democrats really wanted to increase the amount of tax revenue collected by the government, they would reduce tax rates and not increase tax rates. This tells me that their motive is not to generate more revenue--but to penalize successful taxpayers.

 

 

 

 

 

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