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Author | Topic: Trickle Down Economics - Does It Work? | ||||||||||||||||||||||||||||||||||||||||
Straggler Member Posts: 10333 From: London England Joined: |
Unleash the wealth of the wealthiest by cutting their taxes and removing any regulations that might stifle their entrepreneurial activity and we will all be better off as a result. If we stop taking away the wealth of those who are wealth creators they will put their superior wealth generating talents to use through investment and the result will be jobs, economic growth, innovation and raised living standards for all.
That is the theory. Does it work? What does the evidence say? I'm not interested in left-wing arguments about what is "fair" here. Nor am I interested in right-wing arguments proclaiming that tax is "theft" and suchlike. What I want to know is what does the evidence say about trickle-down economics and it's effect on living standards for the workforce as a whole. Does it benefit the majority (as it's advocates suggest) or does it benefit the wealthy minority at the expense of the majority (as it's detractors suggest)? What evidence is there and what does this evidence tell us?
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Straggler Member Posts: 10333 From: London England Joined: |
The Laffer curve is a very good starting point for this discussion.
Phat writes: If the tax rates are too low, no revenue comes into the government and they make no money. If the tax rates are too high, why work at all? I think those of all economic persuasions would agree that the two extremes are basically accurate. What I am less sure of with regard to the Laffer curve is: 1) Is the shape of the curve simply an extrapolation of reasoning regarding the two extremes or something that is empirically evidenced? 2) If the Laffer curve is accurate where does the tipping point lie and what factors might affect this? 3) Is the Laffer curve generally accepted as accurate by economists?
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Straggler Member Posts: 10333 From: London England Joined: |
Taz writes: Society did try to go all out on trickle down economics in the past. What resulted was some of the worst working and living conditions in human history. As stipulated in the OP I'm interested in evidence in this thread. What are the examples you are thinking of and what evidence is there on which to base your conclusion?
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Straggler Member Posts: 10333 From: London England Joined: |
Phat writes: That does seem to be their philosophy...though they would argue that if the business makes more, then all of the employees would also make more. Is that how it works in practise? Do the businesses that make most profits share the profits? Or do the most profitable companies lower wages, reduce employment rights and generally siphon off the benefits to the bosses at the expense of the workers? No doubt there are examples of both sides of the coin. But is there a definitive trend in there at all?
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Straggler Member Posts: 10333 From: London England Joined: |
Jon writes: If there's any truth to it, then it should have been working long ago, since even after taxes the wealthy are still very wealthy. Advocates of trickle down do not think that the wealthy should get less wealthy. They think that making the wealthy wealthier makes us all wealthier in turn.
Jon writes: (I mean, it has to come from somewhere, right?). In theory it is new wealth. New wealth created as a result of the entrepreneurial endevours of those whose investment wealth has been unleashed.
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Straggler Member Posts: 10333 From: London England Joined: |
Ah - The good old days.....
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Straggler Member Posts: 10333 From: London England Joined: |
I'm no proponent of trickle down economics but I am going to play devils advocate a bit.
Jon writes: And this is nonsense because the wealthy have always been wealthy. Where's the trickling? Wealth is a relative term. Compared to times gone by we (in the industrialised West) are all wealthier. We live in greater material comfort and for longer than ever before. This increased wealth is a result of the economic growth that is itself the result of the entrepreneurial activity of the wealth creators under discussion.
Jon writes: And for the past few decades, the wealthy have paid substantially less in taxes than previously. And look... we's all still poor! Poor compared to who? Even the poorest in our societies have food, shelter and a degree of material comfort that would boggle the minds of previous generations. Nobody said that everybody would be equally rich. The argument is that trickle down economics raises the bar for everyone. There are still those who are "poor" in relative terms but even the poorest are richer in absolute terms than they would have been without the economic activity spurred by the wealth creators.
Jon writes: Sure. But who digs up the resources? Who transforms them into products? Who sells them? Who buys them? Who innovates the products and invests in the factories and equipment etc. that are required for any of this economic activity to happen in the first place?
Jon writes: Like I said, all these 'wealth creators' are only creating wealth for themselves, which becomes theirs only because they snatch it off the backs of the people actually generating it. Any investor invests in order to gain themselves. The question is whether or not their gain also generates wealth for those they employ.
Jon writes: If ever it 'trickles down', the effects are negligible. Then to what do you attribute the increased living standards we have all enjoyed?
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Straggler Member Posts: 10333 From: London England Joined: |
As stated in the OP I don't want to get hung up on what is fair etc. And I don't think anyone doubts that rich people spend money.
What I am interested in is whether or not cutting the taxes of the richest ultimately benefits all by facilitating wealth creation. This (as Dr A rightly states) is an empirical question. The problem is I am not really sure what empirical evidence is necessary or available to settle this question...?
Percy writes: The answer to the problems of those at normal income levels is not to get rid of or penalize the rich. Is the answer to cut their taxes and wait for the positive effects to filter through? If trickle down economics works - The answer to this would would be "yes".
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Straggler Member Posts: 10333 From: London England Joined: |
Percy writes: What does it mean to ask if trickle down economics works? Well lets first state what we mean by "trickle down economics". From Wiki:
quote: So when I ask - Does trickle down economics work? I am asking if cutting the taxes of the richest demonstrably improves the living standards and wealth of society as a whole.
Percy writes: What I think the question about whether it works is really asking is, "In terms of the greater good, who is better able to decide what the rich should do with their money, the rich or the government?" With all due respect I think you are changing the question. If we are going to cut taxes to stimulate the economy we could, for example, cut sales taxes that affect everyone. Or taxes that affect the middle classes most significantly. Or we could remove the poorest from paying tax altogether. Or we could not cut taxes and instead invest in public infrastructure projects. The question is which of these has the most positive effect on the economy as a whole and which ultimately has the biggest benefit for all in terms of raising living standards. If cutting taxes for the richest is the most effective means of generating wealth then trickle down economics works. If it doesn't do this it doesn't work. So we need the evidence.....
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Straggler Member Posts: 10333 From: London England Joined: |
Now we are just trading assertions.
Cutting taxes for the wealthiest either demonstrably results in increased wealth and living standards for the majority or it doesn't. This is an empirical question and we need empirical evidence to answer it. I was kinda hoping my devils advocacy would inspire those who know more about the facts of this than I to present some evidence. So far we seem to have established that a few people (yourself included) are adamant that trickle down economics definitely doesn't work. This seems to be based on finding the arguments for it unconvincing rather than any actual evidence that it doesn't work. And we have one person (Percy) who seems to think trickle down economics does work (although I'm not entirely sure he was talking about the same economic theory as the rest of us). I remain skeptical about the claimed benefits of trickle down theory. But I would like to see some economic evidence either way.
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Straggler Member Posts: 10333 From: London England Joined:
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Dr A writes: You say that taxes "can be sufficiently high to dampen economic activity"; I say that in principle it is possible for taxes to be sufficiently high to dampen economic activity. The only distinction between us is that I have used more words. Your additional word(s) make your argument sound more theoretical than practical. Are there any examples of taxes being so high as to have definitively caused a dampening in economic activity? If so what tax rates induced this situation? More generally.... I have stolen a graph that RAZD posted elsewhere: Calamities of Nature: Archive
This seems to suggest that dramatic increases in the incomes of the wealthiest have actually had little positive effect (if any) on the rest of society. This graph seems to support the idea that trickle down doesn't work. Is that a reasonable interpretation? Or is this the wrong evidence/interpretation on which to draw that conclusion? Edited by Straggler, : Spelling
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Straggler Member Posts: 10333 From: London England Joined: |
Pardon my ignorance (and I mean that genuinely here) but what evidence do you mean?
What exactly is the evidence available? And how does it point to trickle down as a failure?
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Straggler Member Posts: 10333 From: London England Joined: |
Well I agree.
All the evidence I am aware of says that the very rich have got very much richer as a result of 30 years of neo-liberal economic policy whilst the rest have experienced stagnation or falls in their economic circumstance. The majority of people work longer for less or the same income, have less job security, less benefits, reduced public services and increasingly worthless pensions. National GDP (I am thinking of the US and UK here) increases but the dividends of that increased national wealth are distributed almost exclusively amongst the very top percentiles. That is my anecdotal experience. That is what I believe. That is the (limited) evidence I am aware of. But surely, if this picture is true, we can point to more concrete evidence of this than my one simple (stolen - Thanks RAZ) graph? Surely if this is true there is a whole heap of economic data that supports this view? If so where is it? What am I missing?
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Straggler Member Posts: 10333 From: London England Joined: |
I'm happy to consider what we have.
What I am genuinely less sure about is what relevant data we do indeed have. Is the graph I stole from RAZ the be-all-and-end-all of evidence against trickle down theory? Or is there more? If so what is the core evidence that refutes trickle down economic theory?
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Straggler Member Posts: 10333 From: London England Joined: |
Straggler writes: If cutting taxes for the richest is the most effective means of generating wealth then trickle down economics works. If it doesn't do this it doesn't work. Percy writes: It isn't a question of whether trickle down works or not. Of course it works. Does it? How do you know it works? You seem to be conflating the simple fact that rich people spend money in the local economy with the claim of trickle down theory that tax cuts for the richest rather than anyone else is an effective method of creating new wealth for all. Unless cutting taxes for the richest (rather than cutting taxes for the not-so-rich or instead of increased public spending) demonstrably results in raising the wealth level for all - trickle down doesn't work.
Percy writes: The question is whether it works better than government, and that's a function of tax rates, i.e., where you are on the Laffer curve. That really isn't the question here. Trickle down theory isn't just about whether money is better spent by government than individuals. Trickle down theory stipulates that an even greater share of the money available placed in the hands of the richest is a superior method of spurring growth and creating new wealth than either placing this same money in the hands of the not-so-rich or investing in public infrastructure programmes.
Percy writes: I agree that detailed data is needed to have a better chance of answering the question... There has been a bit of a lack of data in this thread. But I have posted this: Calamities of Nature: Archive
This seems to suggest that over the last 30 years the dramatic increases in the incomes of the wealthiest have actually had little positive effect (if any at all) on the rest of society. This graph seems to support the idea that trickle down doesn't work.
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