Failed to "trickle down"- support the American Families Plan

Echo opinion published in The State Journal-Register, newspaper in Springfield, Illinois, by Ralph Martire.

President Joe Biden recently addressed a joint session of Congress to advocate for his proposed “American Families Plan.” During that speech, he made a case for America to move on from its misguided embrace of “trickle-down” economics. 

There are two compelling reasons why Biden was right to suggest scrapping trickle-down once and for all. 

First, it’s never actually delivered the economic benefits it promised. Second, it has materially contributed to the antipathy which many hold for American government today.

The basic premise of trickle-down is easy to understand: cutting taxes on corporations and the wealthiest members of society always stimulates faster private sector economic growth, because it augments disposable income where incomes are greatest, thereby freeing up significant private earnings for enhanced spending and investment. This will ultimately trickle down to benefit low- and middle-income earners, as wealthy individuals and corporations use their tax savings to invest in business expansion and job creation. Adherents further contend that, because so many will gain new and better paying jobs from the trickle-down effect, the tax cuts will pay for themselves.

Interesting theory — but the evidence conclusively shows it’s never worked in practice. In fact, according to a recent study of 18 OECD nations — including the U.S. — that implemented trickle-down tax cuts over the last 50 years, the London School of Economics found cutting taxes for the wealthy has a stimulative impact on the economy that’s “statistically indistinguishable from zero.”

What the data show these tax cuts do accomplish, however, is worsen the alarming growth in income inequality that’s characterized the U.S. economy ever since trickle-down was first implemented in 1981. For context, from the end of World War II through 1980, every class of worker saw their incomes increase in real terms. From 1981 on, however, the bottom 90 percent saw their real incomes decline, as more than all the growth in income went to the wealthiest 10 percent. The International Monetary Fund highlighted this development in a study which emphasized that, while the benefits of these tax cuts don’t trickle down, they do help the rich get richer.

But wait, there’s more. Because the tax breaks given to wealthy individuals and corporations do not in fact trickle down, the job creation and economic growth that are supposed to generate the new revenue to pay for these tax cuts never materialize. Meaning these tax cuts create huge deficits.

Which as it turns out was the real goal of trickle-down advocates all along. For proof, look no further than Grover Norquist*, one of the long-time champions of trickle-down. Sure, he pays homage to the company line that trickle-down tax cuts stimulate economic growth — despite all the independent research proving it doesn’t. Far more telling, however, is his contention that such tax cuts would “starve the beast” so powerfully, they’d reduce government down to the size where he could “drown it in a bath tub.”

Of course, deficits diminish the capacity of the public sector to fund services and infrastructure needs to the levels necessary to satisfy demographically driven demand. So communities across the country end up with underfunded schools and lousy roads, while middle-income families without health insurance remain one major illness away from bankruptcy. And underfunding these services makes for poor economic policy, given the data show that, in addition to meeting community needs, spending on core public services and infrastructure does have a statistically meaningful stimulative impact on private sector growth.

To top it off, deficits created by these tax cuts constrain government resources to the point where public service outcomes are less than desirable. This leads to the most pernicious consequence of trickle-down tax cuts: how effectively they shake the public’s confidence in and support of government. That’s because, when the public sector produces inadequate outcomes in services like education, folks don’t take the time to scrutinize why, they just get disillusioned with government in general. 

Which means Biden is right: to ensure a better tomorrow for America, trickle-down should be scrapped today.

Ralph Martire is Executive Director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University. rmartire@ctbaonline.org.

*The primary promoter of the (IMO- evil!) Taxpayer Protection Pledge, a pledge signed by lawmakers who agree to oppose increases in marginal income tax rates for individuals and businesses, as well as net reductions or eliminations of deductions and credits without a matching reduced tax rate. Prior to the November 2012, election, the pledge was signed by 95% of all Republican members of Congress and all but one of the candidates running for the 2012, Republican presidential nomination.