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How To Make Trickle-Down Economics Work.

Posted on 28th January 2023

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One of the ongoing scandals around the world is the habit of governments to keep giving tax breaks to rich people and large corporations, while lower-income workers and the unemployed are ignored. The justification by those governments is always trickle-down economics.

The theory behind trickle-down economics is simple, and seems plausible: if you give people money in any way (tax cuts, grants and subsidies, paying for education or even in the form of food banks which leave people more disposable income), they will spend at least some of it. Governments get a proportion of the money back in the form of sales tax (VAT) and income tax, and most of the rest is spent again, reaping more tax income for governments and another round of people getting their share and spending, and so on, ad infinitum. The theory is often interpreted to mean that it doesn't matter to whom you give the money, and this is used to justify giving it to the rich.

Trickle-down economics came to the fore under Ronald Reagan, and seemed to work [accordding to The Balance Money] (but he also ran a huge programme of government spending that stimulated the US economy, and also cut income tax for lower income workers as well as the rich). The theory has, however, since been thoroughly debunked and is rejected by the International Monetary Fund (IMF) [see here on The Balance Money]. Despite the theory being debunked, governments are still applying it by giving tax cuts to the rich (see here on the BBC.

Trickle-down economics is widely, and justly, blamed for the ever widening wealth gap in today's society. There is a table here on Global Finance Magazine which shows how bad things are.

I recently read an article (which I can no longer find - sorry) explaining, at least in part, why trickle-down economics, as currently implemented by most governments, doesn't work: if you give rich people money, they are much less likely to spend it because they don't need it, so it gets saved and doesn't trickle down. There is a more detailed analysis of what is wrong with trickle-down economics here on Fair Economy. It is clear from this explanation what needs to change: trickle-down economics can only work if the money is given to lower income and unemployed people (those who need it and are guaranteed to spend it, thus driving the trickle down).

It is time for governments to actually listen to economists and:

  • Raise taxes on the rich;
  • Cut taxes on the poor;
  • Introduce (or increase) wealth tax on the excessively rich;
  • Introduce a comprehensive welfare system (unemployment benefit, health care, etc.) which will actually drive the trickle-down and generate more tax revenue for governments.