The 'Trickle-Down Theory' of Economics: Fact or Fiction?

I am indebted to Thomas Sowell for much of the information in this piece and would encourage all to read his 13-page booklet here rather than my musings on it…but since I know that won’t happen for most I will endeavor to boil it down because I am tired of hearing so much disinformation from those involved in the class warfare that is destroying our economy and this country along with it. My objective is to shine a little light on the truth and dispel some of the error along the way.

Why is it that any and all attempts to lower tax rates for all equally always seems to draw the cry of “tax cuts for the rich?” Is there something that people don’t understand about percentages or proportion? Is it so difficult to understand that an 18-inch pizza yields larger equally sliced pieces than a 12-inch pizza? Have our schools failed us so badly that we can’t understand that the larger the initial amount taxed the larger the amount turned back by an equal percentage tax cut across the board?

And here’s where we get the term “trickle down.” Some rocket scientist posing as an economist informs us that the $250 tax cut represented by a 5 percent reduction on a tax liability of $5,000 when contrasted to the $2,500 tax-cut represented by the same 5 percent reduction on a $50,000 dollar tax liability is proof of the “trickle-down theory;” as if both were not a 5 percent across the board reduction. Mr. Sowell informs us, “No such theory has been found in even the most voluminous and learned histories of economic theories.” Yet we continually hear of this non-existent theory in article after article in rags like the New York Times and Washington Post as well as from our liberal politicians…and, much to my dismay, even in comments on the Patch, including some of Patch’s various editors who should really know better.

Samuel Rosenman, FDR’s speech writer, made reference to an idea that had prevailed in Washington since the 1920s that prosperity at the top of the economic pyramid would “trickle down” to the benefit of all. What did we hear in 2008 but Mr. Obama attacking “the economic philosophy” that “says we should give more and more to those with the most and hope that prosperity trickles down to everyone else.” Rosenman was referring to a series of tax rate reductions enacted during the decade of the 1920s which had been advocated by then Treasury Secretary Andrew Mellon that had nothing whatsoever to do with any so-called, non-existent “trickle-down theory.”

Every time the argument is made to lower taxes to effect economic growth we hear the same worn out attacks about the so-called “trickle-down theory” that really only exists in the rhetoric of those opposing any reduction in taxes that would be extended to the wealthy. The fact is that high tax rates in 1921 had resulted in vast sums of wealth being put into tax shelters as tax-exempt municipal bonds and were thus unavailable as tax revenue nor, more importantly, for investment into the private economy where that wealth would create increased output, rising incomes, and more jobs. Over the decade preceding the 1920s, tax exempt securities had nearly tripled. Can you guess what happens in circumstances when tax rates are so prohibitively high that the wealthy seek tax shelters? The less fortunate are left to make up the difference in the lost tax revenue. Higher tax rates thus end up causing more harm to those such rates were promised to help.

The result of the cuts in tax rates that occurred during the 1920s was rising output, increased employment leading to that rising output, and rising incomes. But something else occurred that seems to have totally escaped today’s tax-cut critics; rising tax revenues due to rising incomes even in the face of lower tax rates. And guess what? Those in higher income brackets still paid a larger amount of all collected taxes as well as a higher percentage of all taxes even though we had experienced what some still insist on referring to as “tax cuts for the rich.”

Mr. Sowell informs us that history doesn’t lie and that the facts are there to be seen by all. In 1921, when the tax rate for those making over $100,000 was 73 percent, income tax revenue stood at just over $700 million, of which 30 percent ($210 million) was paid by the “wealthy.” By 1929, when the tax rate had finally been reduced all the way down to 24 percent on those making over $100,000, tax revenues exceeded $1 billion and 65 percent of that revenue (over $650 million) was paid by the wealthy. Why, lo and behold, the lowering of the tax rates on all equally, resulted in an even higher portion of all collected taxes coming from the wealthy.

OK, I get it—all the math and financial detail is probably giving you a headache so I’ll stop. What I’ve provided is a start to make the point that “trickle-down theory” is a smokescreen by those who seek to control our lives through raising taxes ever higher and higher. Regardless of what is done with the revenue, when politicians find more and more ways to take more and more of our earnings it reduces us all to tax slaves and that’s exactly the point in doing it. Rather than allow us to fund the causes we choose with our dollars—a situation that makes it more difficult for self-serving officials to control us—it is more profitable for these so-called “public servants” to keep us at their behest by taxing us at ever higher and higher rates and making us think they are doing it for us as if we have no ability to run our own lives.

In order to entice the wealthy to invest their money into the economy there has to be incentive in the form of a worthwhile return on investment. Lower tax rates are an enticement to invest one’s money into the economy where there is risk involved. The trade-off to that risk is that there is also potential to attain a higher rate of return, even after taxation, than one would realize from tax-exempt securities. The advantages to investing have to outweigh the associated risks involved with such activity otherwise tax-exemption, with its guaranteed outcome, becomes more enviable than the risk of investment followed by the punishment of higher tax rates. Higher tax rates erode return on investment and when the break-point is reached the smart money exits the economy hurting everyone and everything. Fact: Higher tax rates equate to less people paying; lower tax rates equate to more people paying.

Now, can someone, anyone, please point me to any data showing any time in our history when the wealthy paid at lower tax rates than the rest of us? I would forever be in your debt.

Finally, will someone please step forward and refute what I have written along with the additional facts and proofs that Mr. Sowell provides for us in his short booklet, “Trickle Down Theory and Tax Cuts for the Rich?” Don’t take my word for it—read Mr. Sowell.