UM2001GRAD
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RE: Dems Rejoice! HHS Report Says % Of Americans On Welfare Is At An All-Time High
Here's a little primer on trickle-down theories (note the bolded sentence at the end):
Quote:In a nutshell, trickle-down theory is based on the premise that within an economy, giving tax breaks to the top earners makes them more likely to earn more. Top earners invest that extra money in productive economic activities or spend more of their time at the high-paying trade they do best (whether that be creating inventions or performing heart surgeries). Either way, these activities will be productive, reinvigorate economic growth and, in the end, generate more tax revenue from these earners and the people they've helped. According to the theory, this boost in growth will ultimately help those in lower income brackets as well. Although trickle-down economics is often associated with the policies of Ronald Reagan in the 1980s, the theory dates back to the 1920s. The name also has roots in the '20s, when humorist Will Rogers coined the term, saying, "The money was all appropriated for the top in the hopes it would trickle down to the needy"
Why anyone would give huge tax breaks to the wealthy eludes many of us. Some would argue that because the rich have used the freedoms of an economy to make much more money than they need, they should give back a larger share than those who are struggling. This is the very idea behind the progressive income tax in the United States: When income reaches higher brackets, the government taxes that excess at a higher rate. But under the logic of trickle-down theory, tax breaks for the wealthy benefit all.
To understand the reasoning behind this, let's take look at the history of the idea and the basic principle of supply and demand. In an economic slump, some say the government should make efforts to increase the supply (output or production) of an economy. Others argue the opposite: Lack of consumer demand is the root of the problem, and government should encourage consumer demand.
Nineteenth-century French economist Jean-Baptiste Say argued the former. Say's Law states that the way to economic growth is to boost production, and demand naturally follows. This flew in the face of the belief of the time, which was that a lack of money -- and thus lack of demand -- caused bad economic times [source: Skousen]. Say asserted that there will always be a demand for the right kind of products.
You could think of it this way: If there are people willing to work during a recession, they obviously want money in order to consume something. They must already have a demand that is not being met -- what they demand is either too expensive for them to afford or is not being produced. Producing in-demand products and driving down costs will create profit for the seller, and thus the means for him to satisfy his or her demand. Hence, production greases the wheels of the economy. This logic made sense to major thinkers of the time, including Thomas Jefferson and James Madison [source: Acton Institute].
A century later, the tide had turned in the United States. By the time the Great Depression hit in the 1930s, many legislators held the opposite view. The most notable opponent to Say's Law during this time was John Maynard Keynes, a British economist. Keynes argued that there are such things as overproduction and lack of demand, and the key is to increase demand rather than supply. Government should promote consumer demand rather than entrepreneurial production. When people consume more, they create more jobs and production.
Arguing that "in the long run, we are all dead," Keynes pushed for short-term fixes for immediate economic stability. He encouraged governments to adjust monetary policies (interest rates and the availability or amount of money circulating) and fiscal policies (government spending and taxes) to boost demand. Part of these adjustments includes increasing taxes on the rich and reducing taxes on the poor. While the rich would invest their money on making more products, the poor would be more likely to spend, consuming the oversupply that was the source of the problem [source: Wanniski]. Keynesian economics continued as the predominant philosophy in the United States for decades to come.
By the 1970s, trickle-down ideas were percolating in the minds of some economists who sought a return to Say's principles. Next, we'll learn how economists were able to garner support for trickle-down theory.
Why do trickle-down economists think that taxing the wealthy less leads to an increase in production? That can be explained in terms of tax revenue. Some argue that giving tax breaks to the wealthy can actually increase tax revenue for a government. This might seem difficult to believe, but Arthur Laffer argued otherwise. Working off ideas posed by 14th-century Muslim philosopher Ibn Khaldun and John Maynard Keynes, Laffer concluded that government tax rates and revenues don't have a directly positive correlation.
In what became known as the Laffer Curve, Laffer showed that the relationship between taxes and revenues looks like a curve rather than a straight line. In other words, tax revenues don't rise consistently like tax rates do (which would look like a straight, positive correlation). Laffer's curve shows that when tax rates are at zero, revenues are zero as well -- the government makes no money when it taxes nothing. But it's the same result if the tax rate were 100 percent. Think about what would happen if the government demanded every cent in your paycheck. Why work -- or why tell the government what you're making? The government would bring in no money because there'd be no incentive to work or to report earnings.
So tax revenues are zero when the tax rates are at zero and 100 percent -- most agree about that. The question is, what does it look like between these extremes? The Laffer Curve postulates that once the rates get too high, the steep taxes discourage work to an extent that the revenues themselves suffer. Take another scenario: By June, you've already made a million dollars, and the progressive tax system promised to tax that income 50 percent. However, anything you make over a million will be taxed 90 percent. Why work the rest of the year when you know you can only keep 10 percent of your income? You'd probably take your half a million and retire to your beach house until next year. At this point, the taxes are discouraging work and tax revenue.
The range in which taxes are too high for maximum revenues is called the prohibitive range. When taxes are in the prohibitive range, a tax cut would produce an increase in tax revenues, according to Laffer [source: Laffer]. But the ideal tax isn't necessarily 50 percent; rather, it depends on the taxpayers [source: Wanniski].
Through Laffer's Curve, we can visualize how tax rates could discourage people from producing, which results in fewer jobs and a hurting economy. On the flip side, lowering taxes at the right time can reverse these effects. Laffer points to examples in U.S. history where lowering high tax rates increased not only government revenue, but also increased gross domestic product (GDP) growth and lowered the unemployment rate [source: Laffer].
Jude Wanniski built on Laffer's idea and argued for a return to ideas centered around Say's Law -- in other words, increasing production. If Laffer's Curve is correct, then cutting taxes for the wealthy can encourage investment and production to promote general economic health. Wanniski explains in "The Way the World Works" how boosting the supply side of the economy rather than the demand side is the way to economic prosperity. He also makes clear that cutting the prohibitive, high taxes of the wealthy will encourage more economic activity and growth for all. Redubbed supply-side economics (which supporters find a less polarizing name), trickle-down economics found new life in the United States in the 1980s. But before we get to its implementation, let's sum up the basics of trickle-down economics.
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Dems Rejoice! HHS Report Says % Of Americans On Welfare Is At An All-Time High
