Let's Leave Trickle-Down Behind for 'Gush-Up' Economics | Opinion

In the weeks following significant Republican gains in Virginia and New Jersey, Democrats have rushed to pass President Joe Biden's Build Back Better and infrastructure plans. But these bills still face a major obstacle: reluctance on the part of Democratic senators Joe Manchin and Kyrsten Sinema, among others, to raise taxes on the wealthy. Given the rising electoral impact of working families, and the present state of U.S. tax policy, this reluctance is inappropriate.

Manchin has stated that he does not want to punish billionaires for their success, noting that they "bring a lot of jobs, invest a lot of money and give a lot to philanthropic pursuits." The senator is right to not want to punish creation of wealth by the working rich—building wealth through entrepreneurship and productive investment is vital. But this typical framing of taxation as punishment reveals that D.C. is flying our political economy on autopilot, programmed on an outdated ideology of trickle-down economics. What is worse, trickle-down policies have made our economy top heavy—negatively stable, in engineering terms—and destined to crash.

D.C. needs to leave behind trickle-down economics for "gush-up" economics. Over 60 percent of Americans support policies that would make billionaires pay taxes that are more proportionate to their wealth. Earlier this month, Elon Musk showed his willingness to pay taxes on unrealized capital gains. More favorable tax policies for working families would create a more productive economy, inspiring GDP growth rates and broad expansion of wealth.

In the early 1980s, trickle-down policies were enacted to increase the supply of investment capital. Forty years later, the needs of the economy are different. Now, we have a growing glut of hoarded capital at the top, weakening middle-class balance sheets and ballooning working-class debt. From 2001 to 2016, middle-class families saw their median net worth shrink by 20 percent and working-class families lost 45 percent. Even after multiple economic expansions, the total net worth of the bottom 50 percent of Americans is 20 percent less than it was in 1990. After the same period, the top 1 percent of families has $41 trillion in assets. Twenty American individuals now have as much wealth as half the U.S. population (152 million people). Three families have a combined wealth that increased by 5,868 percent, now totaling $348.7 billion.

Clearly, we need to rebalance towards positive stability. But how do we answer Manchin's objection? Forget punishment. This is about taxing individuals based on their ability to pay, and on their stake in the economy. Adam Smith, the founder of modern economics, stated in The Wealth of Nations that "The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate."

Joe Manchin press conference
WASHINGTON, DC - NOVEMBER 01: Sen. Joe Manchin (D-WV) talks to reporters at the U.S. Capitol on November 01, 2021 in Washington, DC. Manchin announced that he would not support the budget reconciliation bill without knowing more about its economic impact but encouraged members of Congress to vote for the bipartisan infrastructure bill. Chip Somodevilla/Getty Images

Most people think that our tax system follows Smith's principle of proportion. That assumption is incorrect, partly because it tends to account only for federal income taxes. When we add up all taxes—sales, gas, property, income, payroll, capital gains, corporate, estate and so on—we see a pattern: those with the greatest interest in the "estate" contributing a lower percentage of total taxes relative to their income and wealth. Ninety-nine percent of Americans now pay more than double the rate the wealthiest 1 percent pay in taxes relative to their "interests in the estate." The divergence is closer to quadruple the rate when you compare the wealthy and the average middle class person.

Political leaders have the tools to remedy this situation—or to make it worse. The tax code is 70,000 pages, and is constantly changing. Legislators regularly add or subtract thresholds or asset types for taxation and turn any tax dial at their discretion. For example, in 2017, policymakers cut taxes for the wealthiest 5 percent, giving one group a benefit that didn't apply to others. Apart from receiving direct benefits, the rich frequently use policy to hide billions—as highlighted in the Pandora Papers and the ProPublica scandals—by hoarding funds in the Caymans and even in South Dakota. According to a study by RAND Corporation, after decades of D.C. turning the dials in favor of the wealthy, middle- and working-class families have lost out on nearly $50 trillion that instead went to top. Trickle-down policies have become an "antisocial contract" between working families, the wealthy and our government, fueling a doom-loop of distrust. Taxing hoarded wealth would be a healthy corrective not only for our economy but for our civic culture.

To assuage moderate Democrats like Manchin and Sinema, as well as many Republicans, the best route may be one that is ultimately revenue neutral: reducing taxes on middle- and lower-income Americans while taxing hoarded wealth. Solving the hoarding challenge need not mean a massive increase in government spending. Currently, the most politically viable way to address negative stability is to simply balance the tax burden between billionaires, builders and baristas, relative to their wealth and income, without tying new tax policies to efforts to fund new infrastructure and social programs.

We tackled this approach in a longer essay, which explained how to decrease tax incentives for hoarding wealth while increasing tax incentives for productive work and entrepreneurship, all without increasing federal spending. Policymakers have a variety of tools to tax hoarding (net wealth tax, mark-to-market capital gains tax, carried interest provisions, financial speculation tax, etc.) and to reduce the tax burden on working families (child tax credits, earned income tax credits, etc.). Our priority is not the use of any particular tool, but that something be done to discourage hoarding and encourage productive workers and flourishing families.

In a positively stable economy, a country of flourishing families and communities builds social cohesion and prosperity from the bottom up. Achieving that stability would start to rebuild working families' broken trust in national institutions. Restored trust would in turn bring economic prosperity, as families and communities with stronger relationships have higher rates of education and individual productivity. Leaders in D.C. have an opportunity to turn the dials away from dated trickle-down paradigms toward a gush-up economy where all Americans can work in solidarity for mutual flourishing.

Ron Ivey is the founder of Rembrandt Collective, a research affiliate with Harvard Human Flourishing Program and a fellow at the Centre for Public Impact. Tim Shirk is a partner with Fox River Partners and managing director of the Ritchie Family Office.

The views expressed in this article are the writers' own.