‘Trickle-down’ tax idea gets another try

Trump, GOP betting all Americans will benefit if corporations get a break

— Does money roll

Washington 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 “trickle-down” approach was popularized in the 1980s during the Reagan administration, though it dates back at least to a 1932 wisecrack by Will Rogers. And 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.

The nonpartisan Tax Policy Center has found that the House tax plan would deliver an average tax cut of $360 for middle-income taxpayers in 2027. A far more generous bounty would go to the highest-earning 1 percent: An average tax cut of $62,000. For the top 0.1 percent, the gain would average $321,000.

And the income tax cuts for individuals would expire within the next decade. By contrast, Republican 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, in particular, 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 eventually would 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.”

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, contrary to economic assumptions, end up producing more revenue, not less. Economic growth would accelerate, and income would slosh downhill from corporations and the wealthy to ordinary Americans.

Over the years, the concept — also known as supply-side economics — has frequently drawn ridicule.