CMV: The term "Trickle Down Economics" is widely misunderstood and misapplied.

Since Reagan popularized the term, people have been debating it widely. Nowadays, liberals in the United States tend to say that Trickle Down Theory is completely disproven, that tax cuts on the wealthy/corporations in no way contribute to economic growth. This is patently false.

What HAS been statistically disproven, to the best of my knowledge, is that capital gains and income tax cuts for the wealthy/corporations can directly correlate to a raise in wages across the board in the short term. The original concept was sound but was misrepresented by Republicans in a way that made it sound like the money these people/businesses saved on taxes would trickle downward in the form of increased wages. That isn't what happened, but then because the term was tied to that idea people extrapolated that the entire theory is shoddy which just isn't true. This is why.

We calculate GDP by summing up 4 realms of economic activity; consumer spending, government spending, investment, and the net of the countries imports and exports. Historically consumer spending is the largest of these categories at 70% in the U.S., with Government spending being the next largest, followed by investment and a negative number for net exports.

Though the smallest of the positive contributors, investment is important in a way the others aren't. Investment determines how much our production possibilities frontier grows for the next year, essentially determining how much and how fast we can grow in the future.

The government clearly has no problem spending money it doesn't have, regardless of which party is in control. There is very likely a correlation between tax revenue and spending, but it's a very weak one, meaning that for every dollar that is taxed, much less than a dollar goes back into the economy. On the flip side, when people and businesses have money, particularly the ones hat have a lot of it, they either spend or invest it. Statistically wealthy people invest more than they spend, and do both more than they save, but either way that money is going directly back into the economy. By definition, at least with the way our government currently balances budgets, you are growing the economy as well as enhancing future growth by leaving more money out of the government. Unless I'm missing something, though in the short term tax cuts might not be correlated with increasing wages, they most certainly are causally correlated with economic growth which absolutely correlates with rising standards of living and wages over the long term.

Before anyone says "well by that logic why would we ever tax anyone", I'm not saying that cutting taxes on wealthy people and businesses is ALWAYS a good idea. It's all about marginal gain. While the field of economics used to be divided between Keynsian philosophy of spend the economy to greatness and the more Reagan type philosophy of tax cut the economy into greatness, that hasn't been the case for many years now. The field has consolidated to understand and agree that certain degrees of both are necessary. If the economy grows 70 cents for every dollar taxed between a 50% and 60% rate, and grows 40 cents for every dollar taxed between a 60% and 50% rate, then the 60% rate makes more sense. If you swap the 70 and the 40, then the 50% rate makes more sense. These elasticities are NOT constant. One tax rate is not ALWAYS ideal.

Trickle Down Economics isn't just flat out wrong, and Keynsian spending isn't just flat out right. You need to balance the two, and at any given time our county could need more of one or the other, and to determine which we need you need to take a more detailed look at the situation. That's why when people say "Trickle Down Economics" and say that it's wrong or disproven or whatever they want, they are just factually incorrect or misapplying/misunderstanding the term.

Hello, users of CMV! This is a footnote from your moderators. We'd just like to remind you of a couple of things. Firstly, please remember to read through our rules. If you see a comment that has broken one, it is more effective to report it than downvote it. Speaking of which, downvotes don't change views**! If you are thinking about submitting a CMV yourself, please have a look through our popular topics wiki first. Any questions or concerns? Feel free to message us. Happy CMVing!