Trickle-Down Economics

The Theory That Never Was

Thomas St Thomas
Feb 13 · 4 min read
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“What gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so.” — Mark Twain

Rhetoric is a staple of political persuasion tactics, so we should not be surprised by our politicians that use those techniques. But what can be surprising is the effectiveness of those techniques on how we view the world and what we consider to be factual. Trickle-down economics, or the “trickle-down theory,” is one of those rhetorical techniques that has been used so effectively, its existence forms the foundation for how many people characterize a whole genre of politicians and their theories on taxation. But guess what. No such theory exists, and no politician has ever advocated a “trickle-down theory.”

Yes. I know. You just went to Google and searched for “trickle-down theory” and found a ton of references to it. There is even a Wikipedia page on it. But that is not the point. You can also look up a bunch of racial epithets and find their definitions and pages dedicated to them, but that is not evidence of them being accurate representations of the people they are meant to disparage. Same thing with “trickle-down theory.”

“Some years ago, in my syndicated column, I challenged anyone to name any economist, of any school of thought, who had actually advocated a ‘trickle-down’ theory. No one quoted any economist, politician, or person in any other walk of life who had ever advocated such a theory [. . .].” — Thomas Sowell

Arguing against something that does not exist is often what’s referred to as a “strawman fallacy.” The technique is to create a caricature of your opponent’s ideas and avoid arguing the actual points of their assertions. Calling tax cuts over the past century “trickle-down theory” has been arguably one of the most effective strawman caricatures of our time. It has been so effective that major news outlets like the New York Times have on multiple occasions argued against this non-existent theory advocated by nobody. Even economist John Maynard Keynes in The Means to Prosperity discussed trickle-down theory as if it was something necessary to address and debunk. Our politicians, from FDR to as recently as President Obama speaking in 2008, have referred to the idea that giving more to those with so much already would allow that wealth to “trickle down” to the rest of the country. It has become such a staple of the discussion, that even those proposing tax cuts have invoked it against their own interest, as when President Trump’s chief economic advisor, Gary Cohn, used the term to describe their plan to cut taxes.

The problem this use of rhetoric is addressing is that the actual argument for tax cuts is very specific and testable using empirical evidence. If it’s testable, and the evidence for or against it exists, those in favor of higher taxes would have to deal with the evidence. And nobody wants to do that.

The idea is that lower tax rates lead to more investment in the economy, where higher tax rates lead people to seek tax shelters for their money. Thus, when more money is invested in the economy, not only does it lead to economic growth, but it yields higher rates of tax collection. Essentially, people will inevitably change their financial strategies to best serve their own needs as tax laws change. Or, to put some numbers to it, if investment in section A comes with a tax rate of 50%, but investment in section B comes with a 20% tax rate, I’ll gladly put my money in section B. This concept still works if you assume that all people with more money than you are evil and greedy, as it assumes they will only look out for themselves. And the evidence points in that direction.

In 1921, the tax rate on people making more than $100,000 was 73%, and the government collected approximately $700,000,000 in income taxes. By 1929, the tax rate had been reduced to 24% on the same amount of income, but the government collected more than one billion dollars in income taxes. When tax rates fall, finding ways to avoid high taxes are not as necessary, and investment in the economy yields greater results for the investors and increases the amount of taxable income. Similar results were found from similar tactics during tax reductions in 1932, as well as during the administrations of JFK, Ronald Reagan, and George W. Bush.

Calling this concept “trickle-down theory” mischaracterizes the actual argument by making people think that advocates of tax-cutting policies are trying to give more money to rich people. So those rich people might allow us to have some more of it when they hire people to wax their yachts or tip us more at fancy restaurants. This adds a sense of resentment as if we should be grateful for the crumbs that fall off of the table of the rich. It avoids the argument by not dealing with the evidence.

“No such theory has been found in even the most voluminous and learned histories of economic theories, including J. A. Schumpeter’s monumental 1,260-page History of Economic Analysis.” — Thomas Sowell

The evidence of tax policy is not what’s most important for the point of this discussion. What’s important to think about is many of the ideas or concepts we hold to be true may simply be the result of years of repetition and rhetoric. They are debate club tactics that seek to confuse and cloud our judgment about incredibly important topics. They aim to replace our process of thought with copy-and-paste versions of what to think instead of encouraging us to investigate and challenge assumptions. And they are incredibly effective.

But that’s not what should really bake your noodle. Just wait until you start thinking about how many other things you may take as factual, that just ain’t so.

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