Donald Trump’s dream of cutting corporate and individual tax rates is taking center stage as Wednesday approaches. On that day, he plans to unveil “maybe the biggest tax cut we’ve ever had.” Corporate taxes may be cut to 15 percent from 35 percent, and top individual tax rates from 39.6 percent to 25 percent. These cuts not only siphon money away from social programs into the pockets of top earners, but they also stiff the middle and working class by reinforcing the idea that trickle-down economics work.
The concept that slashing taxes on the wealthy will spur economic growth, encourage companies to hire more, and drive wages up is one of the most cherished among conservatives. Rather than have a progressive tax structure and using increased taxes to fund necessary social investments, we’re left with the tired idea that the free market will continue to attempt to fix everything. Instead of lowering taxes on the middle and working classes and offsetting it with increases on corporations and the rich, we’re told that we need to wait for this money after it passes through their hands. Proponents of trickle-down are either working people naive enough to think that the rich care about them, business owners stupid enough to not realize the lower classes are the consumers driving business growth, or wealthy capitalists selfish enough not to care.
It’s difficult to find an economic theory that has been disproved as many times as trickle-down. Since Ronald Reagan implemented widespread tax cuts, conservatives have had a difficult time letting go of their rose-colored views on low taxes for the wealthy. The oft-made comparison of the economy as a pie describes trickle-down as giving lower and middle-classes a smaller piece of it, but that growing the overall size of the pie offsets this. Unfortunately for proponents of trickle-down, analysis of these policies has shown that attempting to grow the economy this way does not result in growing incomes of the middle class, and that the times when the economy grew fastest were when middle class incomes had larger shares. This growth among top earners, while lower earners are left holding the bag, greatly adds to income inequality over time, something that the International Monetary Fund, Harvard Kennedy School Professor Christopher Jencks, Morgan Stanley, and Standard & Poor all conclude hinders economic growth.
While there is no shortage of excellent economic models and well-written books on the subject, the basic concept is not a difficult one to understand. Here’s the way you can explain it to your Reagan-loving friends and family: trickle-down assumes that with extra money left over, businesses will decide to invest in themselves, hiring more workers and expanding their capabilities. This is a cute idea, but the truth is that most business owners would rather have another vacation property than hire you. Their only incentive to hire workers and invest in them is when they have no choice but to do so. Trickle-down doesn’t work because it assumes wealthy people make decisions to benefit people other than themselves and shareholders; if you believe this is true, try explaining why CEOs that make millions of dollars don’t want to pay their employees a living wage.
The reality of our economy is that working and middle-class consumers are job creators; money left in their pocket becomes goods and services purchased by them, purchases that drive business growth. As businesses need to keep speed with demand, they have no choice but to hire more workers or lose their market share, something that cuts into their bottom line. The wealthy cannot be trusted to create jobs and wealth among all classes, and it’s up to a sensible tax system to force their hand. Trickle-down policies are anything but sensible, and the newest attempt at it is another barrier to becoming a fairer society.