Friday, March 03, 2017

"Trumped-up" Trickle Down Economics


Pretty much.

The theory propped by Trump and Paul Ryan: lowering taxes for businesses and wealthy individuals leaves more cash in their pockets, spurring more investment and hiring, and boosting growth -- which in turn would also generate new tax income to pay for the cuts. Win-win-win!

Supply-side economics, also known as trickle-down economics or Reaganomics, have been debunked. The simple reason is that regressive tax cuts doesn't have large enough broad economic multiplier.   In other words: If you give $20,000 to someone who makes $30,000 a year, he or she will spend the extra income on food, clothes, education, and healthcare; but give the same money to someone who makes $1m, and that extra money will probably just sit in a bank.  Others went even further:
There is no evidence that the previous repatriation tax giveaway put Americans to work, and substantial evidence that it instead grew executive paychecks, propped up stock prices, and drew more money and jobs offshore,” said Sen. Carl Levin, chairman of the [Senate Subcommittee on Investigations], in a statement [in 2011].Those who want a new corporate tax break claim it will help rebuild our economy, but the facts are lined up against them.”

Furthermore, the mythical growth benefits of lowering taxes are largely long-term. As a matter of policymaking, in the short-term, the revenue shortfall from tax cuts would need to be paid for -- or else expenditure cuts (i.e. fiscal austerity) would be unavoidable.  Tax cuts generally never pay for themselves in long-term growth.

Proponents often cite strong economic expansion of the Reagan era, which was driven by decreased marginal taxes and looser regulations.  However, economist Paul Krugman argued that the growth was driven by Paul Volcker's monetary policy and favorable business cycle as unemployment rebounds from a high peak.  Federal spending notably expanded (from 20 to 22% of GDP), and public debt balooned (from 26% to 41% of GDP), implying Keynesian economics at work between 1980 and 1988.

The state of Kansas is already ailing from ill-advised, five-year tax policy experiment.  Clearly tax breaks are no substitute for pro-growth policy of actually building an environment conducive to creating good quality jobs. Otherwise, the United States may end up just like Trump's many past businesses.


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