Trickle-down theory
GOP reviving approach with a spotty record
The GOP tax plan hinges on the idea that slashing corporate taxes will lead to higer wages and more employment.
WASHINGTON — Does money roll downhill?
In their drive to cut taxes, President Donald Trump and congressional Republicans are betting it does.
Behind their legislation is a theory long popular among conservatives: Slash taxes for corporations and rich people, who will then hire, invest and profit — and cause money to trickle into the pockets of ordinary Americans. The White House says the plan’s corporate tax cut alone would eventually raise average household incomes by $4,000 a year.
The tax plan’s “trickledown” approach was popularized in the 1980s during the Reagan administration. History shows it has a spotty record of delivering on its promises.
The Republicans’ latest version of the approach edged closer to the finish line Thursday when the House passed its form of the bill; the Senate is working on its own. Republicans hope to send final legislation to Trump by Christmas, though it’s unclear whether they can succeed by then.
Among the key planks in their legislation: Shrink the corporate tax rate to 20 percent from 35 percent. End or ease the inheritance tax on the wealthiest estates. Cut taxes on business partnerships. Offer a temporary tax cut on corporate profits held abroad. Repeal the alternative minimum tax on very high earners. And reduce personal income tax rates for many.
‘Will increase wages’
The nonpartisan Tax Policy Center has found that the House tax plan would deliver an average tax cut of $360 for middleincome taxpayers in 2027. A far more generous bounty would go to the highestearning 1 percent: An average tax cut of $62,000. For the top 0.1 percent, the gain would average $321,000.
The income tax cuts for individuals would expire within the next decade. By contrast, GOP lawmakers say the tax cuts for corporations need to be permanent. The tax cuts would also add roughly $1.5 trillion to the federal debt.
Republicans argue that the corporate tax cuts would unleash a boom that would speed annual economic growth to at least 3 percent consistently from the so-so 2 percent performance of recent years.
The thinking is that reducing corporate taxes would raise companies’ after-tax profits, thereby encouraging them to invest more. Investments in machines and technology would make employees more productive and empower them to command higher pay. The White House’s own study estimates that the corporate tax cut would eventually swell average U.S. household income by $4,000 a year.
“It will increase real wages, and it will increase them substantially,” says Arthur Laffer, an economist who advised President Ronald Reagan and now runs a consultancy. “It also will increase the number who get jobs.”
Dismal track record
Laffer occupies a position of prominence in the history of trickle-down economics. In 1974, he famously sketched a diagram on a restaurant napkin to illustrate his belief that the government could cut taxes and end up producing more revenue, not less. Economic growth would accelerate, and income would slosh downhill to ordinary Americans.
Over the years, the concept — also known as supply-side economics — has frequently drawn ridicule.
“Voodoo economics” was the derisive term George H.W. Bush applied to it in his failed 1980 bid for the Republican presidential nomination against Ronald Reagan, a supply-side enthusiast.
The liberal economist John Kenneth Galbraith in 1982 likened the trickledown idea to horse manure: “If you feed the horse enough oats, some will pass through to the road for the sparrows.”
In the view of Carl Davis, research director at the leftleaning Institute on Taxation and Economic Policy, the track record for supplyside economics “is not particularly inspiring.”
In 1981, in the midst of a deep recession, President Reagan pushed through an aggressive tax cut. The economy did rebound strongly over the next few years. But economists have long given credit mainly to the Federal Reserve, which aggressively slashed interest rates.
And the tax cuts increased federal deficits, eventually forcing Reagan and Congress to reverse course and raise taxes.
Bruce Bartlett, a former aide to tax-cut advocate Rep. Jack Kemp, says the 1981 tax cut made sense: The top individual tax rate was 70 percent — far above the current 39.6 percent.
But Bartlett, an official in the Reagan and George H.W. Bush administrations, has lost faith in tax cuts. In 1986, he notes, the United States slashed the corporate tax rate from 46 percent to 34 percent. Yet wages fell. Likewise, President George W. Bush’s tax cuts in 2001 and 2003 produced one of the weakest economic expansions in American history: The Bush tax cuts were still in place when the economy sank into the Great Recession of 20072009.
And Kansas has just finished a failed experiment in tax cutting. After Gov. Sam Brownback pushed through big tax cuts in 2012 and 2013, the payoff was underwhelming at best: Tax collections fell, triggering a budget crisis. In June, Kansas passed a big tax increase.