Trickle-Down Economics is Officially a Hoax!

Trickle-down economics is officially a hoax. You might also know it as Voo-Doo Economics. The idea that you can just give massive tax breaks to the wealthy and because they create all value and job opportunities, it “trickle” down to the rest of the economy. Sounds like a law of nature or something, doesn’t it? This concept was first mentioned by Reagan as he completely dismantled the tax code that led to the most prosperous time in American history. It wasn’t only Reagan who was all in on helping the ultra-wealthy, the Democrats helped him pass it. We saw this same logic tested in the Bush Administration with tax cuts for the wealthy and with the lowering of the capital gains tax. One can picture these Republican ‘Noah’s’ parting the seas of hard work and adversity for these trustafarians. Get daddy’s money tax-free, throw it in the market, and watch it grow! If only there were literally zero taxes these rich people could own the majority of the wealth indefinitely in the exact manner of royalty in the old world. Oh wait, many of them, like Bezos, don’t pay any taxes already! Turns out a 50-year study of tax cuts for the wealthy revealed a shocking discovery, they never trickle-down. 

Ok, let’s not act like this was the most obvious thing ever, we still have politicians pushing it on the American public today with the Trump tax cuts. There is some logic to the argument that the wealthy are employers or owners. So in theory you could take a leap without looking closely that if you gave those employers more money, they will hire more workers and spend more money. This is why it is just a theory and not a factual idea, rich people do not spend the extra money like a normal person. For a working-class person struggling to make ends meet, they can think of countless ways to spend the money immediately. To the non-wealthy group of Americans, the trickle-down logic kind of makes sense because we know we would spend the money, boosting the economy, so it makes sense a rich person could do that at a more impactful rate. However the ultra-wealthy live life utterly alien to ours. They aren’t worried about making ends meet, they are just trying to save and grow their fortune. Plus if your house is paid for, you have every material thing you could want with no debt, getting $1,000,000 more won’t spur a spending spree. It’s pennies in the pile. Let’s take the $1,200 stimulus check, picture someone who makes $500,000/year as a software engineer(not even a billionaire), and then someone making $40,000/year as a server who lost their job during COVID, who do you think spent their money quicker? This is where theory butts into reality or something called the velocity of money, you check it out in-depth here. It doesn’t take a scientist to understand that the more impoverished you are the faster you would spend a stimulus check, this is the classic hierarchy of needs. 

So at its core we know the wealthy will not blow the money they are given on local businesses, what about business owners? Won’t they have more money to employ people? This again seems logical, we all seem to know a small/local business owner that we hear talking about how tough the system is on them. However, the people lobbying for these tax cuts aren’t small business owners that you know. These are large corporations, like Comcast, Amazon, Goldman Sachs, the list could go on all night. So if these large companies provide so many benefits to American society how many people did they hire after the Trump tax cuts? Well AT&T laid off a record number of employees after the tax cut to secure enough cash to purchase Time Warner, making a move away from technician services to streaming. Yet this is not AT&T’s fault, these companies do not have brains of their own sickened by greed. AT&T is forced by shareholder expectations and competition to always make more money the next quarter than you did the last. If you are the CEO and your sole purpose is to be more profitable every quarter, naturally you are going to hire the absolute minimum amount of employees to get the job done. Then imagine that Comcast comes up with some new logistical product that allows them to do installs with half the human technicians as AT&T allowing them to drop their prices. AT&T will have to cut the same amount of workers or go out of business. Pair this with automation and we have drag race to the bottom, who can be the first company with no employees, all profit. We are already seeing this today with the business model of the future, Gig-workers. They aren’t employees, you just get to absorb the majority of their production value with zero risks, a capitalist wet dream. 

So if you are some kind of billionaire that actually wants the system to flourish and see your businesses explode, what would work better than tax cuts and keep the workers satisfied? Direct all of these government programs currently going to the ultra-wealthy(Elon Musk), to your customers. See this is their big mistake, workers are the primary consumers. The healthiest economies see a wide array of people with spending power. Perhaps we should propose trick-up economics? 

This is why programs like Medicare for All would be an immediate boon to the economy. Millions of Americans would spend an additional $300-$1600/month in the economy instead of it sitting stagnant in the accounts of billionaires. Perhaps it is time to rethink our priorities.

Studying Ronald Reagan: Part 1 Voo-Doo Economics

Have you ever heard the phrase trickle-down economics? The term gained popularity when Ronald Reagan passed his massive tax cuts to the wealthy in 1981. While the term trickle-down was used by the enemy of that agenda, the right referred to it as supply-side economics. No matter the term the primary idea was that the wealthiest in society create all the jobs, therefore if you give them the money it will “trickle-down” to all members of society. So how did trickle-down economics pan out for us here in America? 

Before engaging in an argument that can be split a million ways about the “success” of the 80’s, let’s open the tool box and see how to dismantle this. Ah, Velocity of Money, that will do the trick. If we remember the velocity of money is the rate at which money changes hands. Later we will dive into why money changing hands is the core of an economy. It is known that someone making less than $50,000/year will spend 100-110% of any tax cut or stimulus given to them. It is also known that a wealthy person with millions of dollars will spend 0-30% of any tax cut or stimulus given. This is really easy to visualize, if you are barely scraping by, that stimulus could help you eat, pay bills, or cloth your children, of course you will spend it immediately. On the reverse side, image what a millionaire did with their $1200 stimulus check, they put it right into their bank. That money won’t see the light of day, or should I say the light of the American Economy again. 

This is one of the major reasons we see massive inequality start to take hold during and after the Reagan Era. Once the wealthy got that chunk of the economy they have no incentive to give it back.

Income Gains Widely Shared in Early Postwar Decades - But Not Since Then

Notice on this chart from the Center on Budget and Policy when those lines really started to separate – 1981. Reagan didn’t change this chart with tax cuts alone, he also completely annihilated unions and any laws protecting workers. 

Let’s dive into his actual tax cuts.

The first tax cut (The Economic Recovery Tax Act of 1981) among other things, cut the highest Personal Income Tax rate from 70% to 50% and the lowest from 14% to 11% and decreased the highest Capital Gains Tax rate from 28% to 20%.

The second tax cut (The Tax Reform Act of 1986) among other things, cut the highest Personal Income Tax rate from 50% to 38.5% but decreasing to 28% in the following years [2] and increased the highest Capital Gains Tax rate from 20% to 28%.

If you caught our tax piece on how the wealthy avoid taxes, your ears probably perked up when you noticed that Reagan first cut the Capital Gains tax, Bush then followed in his footsteps dropping it back to the 20% we see today. This was one of the effective ways to let the wealthy pay far less taxes than workers. When we think about socialism for the wealthy after FDR, this is a prime example. Lobbying the government to change a law so that you make more money. That is socialism, a real competitor would earn it in the market. Funny how the wealthy “capitalist” seem to be so well versed in using the Government to enrich themselves. 

You might have also noticed that the top Marginal Tax rate was 70% before Reagan and 28% after Reagan. That is a radical change. This is the beginning of the extreme wealthy and aristocracy of families like the Walton’s. Imagine owning the bakery, butcher shop, toy store, electronics store, mechanic shop, pharmacy, and garden center in every town in America, then only having to pay a maximum tax rate of 28%. And that is the worst case scenario, they typically avoid all taxation as we have just seen with President Trump paying $750 in taxes in 2016. So the Walton’s and Jeff Bezos are funneling money out of every small town and large city in America, with a majority of the wealth never returning to the system. Think of the economy as a bathtub, the wealthy are putting massive holes in our tub and no one is making them add some water back. With the Reagan tax codes they could drain money from the rest of the country at a rate never seen in America.