Trickling Up

We are in a three-day news cycle regarding the odd comments from Hillary Clinton at a fund-raiser in Massachusetts.  While the media are scrambling to decide whether she had or had not restated the fairly embarrassing Barack Obama "You didn't build that" line, there's another issue here, and that is rewriting history, which is a cardinal sin.

“Don’t let anybody tell you", she said, ". . . that, you know, it’s corporations and businesses that create jobs. You know that old theory, trickle-down economics. That has been tried. That has failed. It has failed rather spectacularly.” 

Ummm, really?  I suppose that, in the view of liberals, anything promoted by conservatives that actually works is a failure in their eyes, but we need a more rational appraisal.  That first takes a definition of the action, and then an actual metric for success.  I would like to think that we could generally agree on those, but they're worth restating.

Trickle-down (or "supply-side") economics is generally taken to be the concept by which tax rates, particularly at the upper income levels, are lowered to, and maintained at "reasonable levels".  In that approach, marginal rates (the marginal rate is the percentage of taxed on the next dollar that would be earned) are reasonable enough so as not to deter the taxpayer from earning any more, or the taxpaying company from expanding sales.

Theoretically, by lessening the tax burden, the taxpayer would have more left to put into the economy, either by saving (which generates funds for lending), investing (which generates funds for expansion and hiring) or spending (which puts money in the economy). 

Liberals oppose this economic model, because at its essence it is supposed to take choice from the government and vest it in the taxpayer.  Because their belief is in the basic capability of government to do everything better than we taxpayers can, their ideal is huge tax rates and income distribution directed by that government.  However, in their drive to fight taxpayer economic choice, they simply rewrite history by ignoring what it does positively for the government, and Mrs. Clinton has done that, as we will see.

How, then, do you measure whether trickle-down economics works?  Paradoxically, for a metric you have to measure its effect by looking at tax revenues.  When you think about it, that makes the most sense -- if trickle-down is doing its job, the economy is enlarging, and the primary way you can measure economic enlargement is to look at whether tax revenues are increasing.  Taxes are on the transactions of an economy -- wages, etc. -- and the more (and larger) transactions the economy drives, the more revenues.

Thus, for trickle-down to be deemed successful, we would have to see a measurable increase in tax revenues subsequent to an organized tax-cutting program.  Fortunately, we have one of those, the USA in the 1980s.  During that time, the tax-cutting program driven by Ronald Reagan through a Democratic Congress, lowered tax rates over three years by a cumulative 23%.  Now -- in that lower tax rates are in and of themselves a good thing (forgetting the revenue impact to the Government, it is never good for taxpayers to take money from them), even if tax revenues in total stayed the same, we should be thrilled, since Washington got the same amount and the taxpayer had more to spend.  Tra-la.

But in fact, the revenues from the individual income tax went up.  Starting in 1983, the first year any impact of the cuts could hit the economy, the revenues were $289 billion.  From there, they went only upward -- $298 billion in 1984, $334 billion in 1985, $348 billion in 1986, and $392 billion in 1987.  Over a four-year period starting in 1983, despite the fears of the liberals, the USA received over $100 billion more per year than before the cuts.  Of course, the Democratic-led Congress then went and spent all that increase and then some, but the tax cuts did what they were supposed to do.

Now, the facts can't be allowed to get in the way, so the liberal argument against the success of trickle-down economics goes straight to the increase in the national debt over that time.  However, deficit spending is not even in the topic of trickle-down, simply because the theory has nothing to do with the spending side, only the revenue side.  We taxed lower and got a lot more tax revenue.  Congress may have accelerated spending faster than the increase in revenue (check who ran the House at the time), but that only served to offset the benefit that trickle-down provided.  The deficit is a red herring.  As now, we didn't have a revenue problem (tax cuts helped that); we had a spending problem.

Hillary Clinton may think that trickle-down economics was a spectacular failure, but if it was, it was only in that its success made it historically impossible for her to argue against tax cuts.  It failed her; it greatly succeeded for the country.


Copyright 2014 by Robert Sutton