Trump Officials Say Trickle-Down Economics Will Work For Tax Plan—Here's Why That's Wrong

The GOP tax plan isn't a handout to the wealthy—it's actually an investment in the richest Americans so they will trickle their savings down to the middle class.

That's at least how the White House spun the Republican proposal, as chief White House economic adviser Gary Cohn said the plan is actually designed to help the rich because the better they do, the better they can help the poor.

“I don't believe that we've set out to create a tax cut for the wealthy. If someone's getting a tax cut, I'm not upset that they're getting a tax cut. I'm really not upset,” Cohn told CNBC’s John Harwood Thursday. “We create wage inflation, which means the workers get paid more; the workers have more disposable income, the workers spend more. And we see the whole trickle-down through the economy, and that's good for the economy.”

The "rising tide lifts all boats" idea remains a popular GOP theory, namely that a tax cut for the very rich creates indirect benefits for middle and lower-class Americans. The more money the very wealthy have, the more they spend, and spending creates jobs. 

But it's not true.

"It's just a pure and completely unconvincing sales job," Jared Bernstein, Senior Fellow at The Center on Budget and Policy Priorities and former economic adviser to Vice President Joe Biden, told Newsweek. "I wish they would just be honest and say. 'We won, we represent the top one percent and we're doing our donors' bidding by cutting their taxes.'"  

But Cohn insisted that the GOP plan would spur growth. "Everything in our tax plan is meant to encourage investment," he said. "The most excited group out there are big CEOs, about our tax plan."

This concept has motivated the Republican Party since, well, forever.

In the 1920s, Presidents Warren Harding and Calvin Coolidge dramatically slashed taxes for top earners under The Mellon Plan. “The wise and correct course to follow in taxation and all other economic legislation is not to destroy those who have already secured success but to create conditions under which every one will have a better chance to be successful,” remarked Coolidge.

The economy soared into the Roaring '20s, but inequality rivaled that of the Gilded Age. By 1929, the bubble burst and the U.S. careened into the Great Depression.

Supply-side economics came back into vogue from time to time, but truly became a GOP bedrock during Ronald Reagan's successful campaign for the presidency in 1980. Trickle-down economics was rechristened "Reaganomics" (though, truth be told, George H.W. Bush famously called it "voodoo economics" —until he became the Gipper's vice president, of course).

But in the 40 years since, the concept has become dated.

America’s rich are richer than they’ve ever been. Yet the gap between the wealthy and poor continues to grow. And the rich aren’t spending money, they’re sitting on it. The top 20 percent of Americans hoard the American dream, they don’t pass it on. Eighty percent of stock value is held by the richest 10 percent of Americans. When the S&P 500 goes up, the middle- and lower-class don’t see the benefits.

"Republicans weave a fantastic tale with lots of steps," said Bernstein. "They create a chain of events with lots of links, and every link has proven to be false. The truth is we've tried this many times before and it always fails."

There is circumstantial evidence over many decades that tax cuts can stimulate growth, but it's by no means assured.

Republicans herald John F. Kennedy as a supply-side tax cutter. They're partially right; Kennedy did cut taxes for the rich, and the economy did soar. But before his cuts, the top income rate was taxed at 91 percent, he lowered that to about 65 percent. Today, those earners pay much less to the IRS, about 40 percent before the many many loopholes. 

Reagan did indeed cut taxes only to raise them again when revenues fell too short to run even his scaled-down government. He raised taxes 11 times over the course of his presidency, though he did reduce the overall tax burden. 

A good recent case against trickle-down, or supply side, economics is a five-year experiment in Kansas.

Republican governor, Sam Brownback, decided to administer a “shot of adrenaline into the heart of the Kansas economy” by considerably lowering the state’s tax rate, eliminating income tax for owner-operated businesses and reducing government services. Kansas has its bonds downgraded twice and became 50th in the nation for employment growth. The cuts left the state with a nearly $350 million budget gap and forced its legislature to make cuts to most state agencies, pension systems, highway projects and universities. In 2017 the Republican-controlled Kansas legislature called the experiment a failure and returned tax rates to normal levels.

"Republicans are ashamed to be honest about what they're really up to," said Bernstein. "They're returning revenue from the U.S. Treasury to the pockets of the wealthy. A tax cut to a multi-national corporation isn't going to help lower class people. But they can't give up the idea of trickle-down economics because they can't sell snake oil without saying it has magic powers."

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