Trickle-down economics, also known astrickle-down theory and thehorse-and-sparrow theory,[1] is a term, most-often used pejoratively, to describe government economic policies that disproportionately favor the upper tier of the economic spectrum (wealthy individuals and large corporations). The term has been used broadly by critics ofsupply-side economics to refer totaxing and spending policies by governments that, intentionally or not, result in wideningincome inequality; it has also been used in critical references toneoliberalism.[2]These critics reject the notion that spending by this elite group would "trickle down" to those who are less fortunate and lead to economic growth that will eventually benefit the economy as a whole.[3]
While criticisms have existed since at least the 19th century, the term "trickle-down economics" was popularized byDemocrats in the US to derogateReaganomics and its reduction in the top marginal tax rates.[4]
Major examples of what critics have called "trickle-down economics" in the US include theReagan tax cuts,[5] theBush tax cuts, and in UK includeMargaret Thatcher's economic policies in the 1980s andLiz Truss'smini-budget tax cuts of 2022.[6][7]
In 1896, United StatesDemocratic presidential candidateWilliam Jennings Bryan claimed in hisCross of Gold speech that his opposition based their policies on the idea that the success of the rich would "leak through" to the lower classes, stating: "There are those who believe that, if you will only legislate to make the well-to-do prosperous, their prosperity will leak through on those below."[8][9][10]
In 1932, humorist and social commentatorWill Rogers wrote a column criticizingHerbert Hoover's policies and approach toThe Great Depression and stated: "The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover was an engineer. He knew that water trickles down. Put it uphill and let it go and it will reach the driest little spot."[11] In 2007, political commentatorWilliam J. Bennett credited Rogers for coining the term "trickle down" and observed its persistent use throughout the decades since.[12]
In 1983,H. W. Arndt wrote that Indian nationalist and statesmanJawaharlal Nehru may have been the first to use the term in an economic (rather than political context) when he stated in 1933 "the exploitation of India and other countries brought so much wealth to England that some of it trickled down to the working class and their standard of living rose."[13]
Samuel Rosenman, a Democratic presidential speechwriter underFranklin D. Roosevelt andHarry Truman, and coiner of the term "New Deal", wrote that "trickle down policies" had been prevalent in American government since 1921.[14] In 1969, after leaving thepresidency, DemocratLyndon B. Johnson alleged "Republicans ... simply don't know how to manage the economy. They're so busy operating the trickle-down theory, giving the richest corporations the biggest break, that the whole thing goesto hell in a handbasket."[15]
Ronald Reagan launched his 1980 campaign for the presidency on a platform advocating forsupply-side economics. During the1980 Republican Party presidential primaries,George H. W. Bush had derided Reagan's economic approach as "voodoo economics".[16] Following Reagan's election, the "trickle-down" reached wide circulation with the publication of "The Education of David Stockman", a December 1981 interview of Reagan's incomingOffice of Management and Budget directorDavid Stockman, in the magazineAtlantic Monthly. In the interview, Stockman expressed doubts aboutsupply side economics, telling journalistWilliam Greider that theKemp–Roth Tax Cut was a way to rebrand a tax cut for the top income bracket to make it easier to pass into law.[17] Stockman said that "It's kind of hard to sell 'trickle down,' so the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory."[17][18][19] Reagan administration officials includingMichael Deaver wanted Stockman to be fired in response to his comments, but he was ultimately kept on in exchange for a private apology.[20]Political opponents of theReagan administration soon seized on this language in an effort to brand the administration as caring only about the wealthy.[21] In 1982,John Kenneth Galbraith wrote the "trickle-down economics" that Stockman was referring to was previously known under the name "horse-and-sparrow theory", the idea that feeding a horse a huge amount of oats results in some of the feed passing through for lucky sparrows to eat.[22]
In the1992 presidential election,independent candidateRoss Perot also referred to trickle-down economics as "political voodoo".[23] In the same election, during a presidential town hall debate,Bill Clinton, referring to the previous presidencies ofRonald Reagan andGeorge H.W. Bush stated "...we've had 12 years of trickle-down economics. We've gone from first to twelfth in the world in wages. We've had four years where we’ve produced no private-sector jobs. Most people are working harder for less money than they were making 10 years ago".[24]
Author and political commentatorWilliam Safire, in his political dictionary published in 2008, defined "trickle-down theory" as "The idea that aid to corporations will seep through to employees and irrigate the economy."[10]
While the term "trickle-down" is commonly used to refer to income benefits, it is sometimes used to refer to the idea ofpositive externalities arising from technological innovation or increased trade.Arthur Okun,[25] and separatelyWilliam Baumol,[26] for example, have used the term to refer to the flow of the benefits of innovation, which do not accrue entirely to the "great entrepreneurs and inventors", but trickle down to the masses. And Nobel laureate economistPaul Romer used the term in reference to the impact on wealth from tariff changes.[27] TheLaffer curve is often cited by proponents of trickle-down policy.[28][6]
The political campaign group,Tax Justice Network has used the term referring broadly to wealth inequality in its criticisms oftax havens.[29] In 2013,Pope Francis used the term in hisapostolic exhortationEvangelii gaudium, saying that "Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world."[30]
In New Zealand,Damien O'Connor, anMP from theLabour Party, called trickle-down economics "the rich pissing on the poor" in the Labour Party campaign launch video for the2011 general election.[31] In a2016 US presidential election candidates debate,Hillary Clinton accusedDonald Trump of supporting the "most extreme" version of trickle-down economics with his tax plan, calling it "trumped-up trickle-down" as a pun on his name.[32] In hisspeech to a joint session of Congress on April 28, 2021, US PresidentJoe Biden stated that "trickle-down economics has never worked".[33] Biden has continued to be critical of trickle-down.[34][35]
A Columbia journal article comparing a failed UKEnterprise Zone proposal to later US proposals references them as a form of trickle-down policy where lower regulatory and tax burdens were aimed at wealthier developers with the hope they would benefit residents.[36] Nobel laureatePaul Krugman states that despite the narrative of trickle-down style tax cuts, the effective tax rate of the top 1% of earners has failed to change very much.[37] Political commentatorRobert Reich has implicated institutions such asThe Heritage Foundation,Cato Institute, andClub for Growth for promoting what he considers to be a discredited idea.[38] Kansas governor and politicianSam Brownback's 2018 tax cut package was widely labelled as an attempt at trickle-down economics.[39]Friedrich Hayek's economic theories have also been described as trickle-down by his opponents.[40][41]
In 1983,H. W. Arndt described the term as a myth, saying that no major economists of the 1950s assumed that wealth would accumulate among the rich and then spread to the poor.[42]
Speaking on theUS Senate floor in 1992,Hank Brown (Republican senator for Colorado) objected to the use of the term for the policies of Ronald Reagan andGeorge H. W. Bush, saying that they have never advocated for it.[43][non-primary source needed]
Thomas Sowell, a proponent ofsupply-side economics, says that trickle-down economics have never been advocated by any economist, writing in his 2012 essay"Trickle Down" Theory and "Tax Cuts for the Rich" that "[t]he 'trickle-down' theory cannot be found in even the most voluminous scholarly studies of economic theories."[44][45] Sowell disagrees with the characterization of supply-side economics as trickle-down, saying that the economic theory of reducing marginal tax rates works in precisely the opposite direction: "Workers are always paid first and then profits flow upward later – if at all."[46][47][better source needed] In 2014, Sowell called trickle-down economics the "biggest lie in politics," and said "The time is long overdue for people to ask themselves why it is necessary for those on the left to make up a lie if what they believe in is true."[45]
Benjamin Lockwood, professor of business economics and public policy atWharton, said "The term ‘trickle-down economics’ doesn’t really represent a cohesive economic theory,” “It’s a term used, often negatively, to characterize the view that reducing taxes on the rich will benefit the non-rich.”[3]
In 2022, theLiz Truss administration objected to characterizing its policies as "trickle-down economics".[48]
Nobel laureateJoseph Stiglitz wrote in 2015 that the post–World War II evidence does not support trickle-down economics, but rather "trickle-up economics" whereby more money in the pockets of the poor or the middle benefits everyone.[49] In a 2020 research paper, economists David Hope and Julian Limberg analyzed data spanning 50 years from 18 countries, and found that tax cuts for the rich increased inequality in the short and medium term, and had no significant effect on real GDP per capita or employment in the short and medium term. According to the study, this shows that the tax cuts for the upper class did not trickle down to the broader economy. From 1980 to 2016, adivergence in the distribution of wealth was noted, with the top .01% of earners seeing a 600% change in real income, vs a 0% change in the bottom 99%, leading to the top 1% accruing 15% more of the total wealth pool, from a share of 15 to 30%.[50][51][52][53]
A 2015 IMF staff discussion note by Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka and Evridiki Tsounta suggests that lowering taxes on the top 20% could actually reduce growth.[54][55] Political scientists Brainard Guy Peters and Maximilian Lennart Nagel in 2020 described the 'trickle down' description of tax cuts for the wealthy and corporations stimulating economic growth that helps the less affluent as a "zombie idea" and stated that it has been the most enduring failed policy idea in American politics.[56]
Sowell noted thatJohn Maynard Keynes in 1933 said, that “taxation may be so high as to defeat its object,”.[45]
He also noted that even left-wing politicians likeWoodrow Wilson in 1919 stated that very high tax rates are detrimental to the economy at large andJohn F. Kennedy in 1962 stated "it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now."[45]
Kent Smetters, Wharton professor of business economics and public policy, says that trickle-down economics is a term created to disparage supply-side economics. ... Many others have pointed out the folly of using the term — that no real economic model or serious school of thought stands behind what has long been a term of art at the intersection of politics and media. Part of the problem is that "trickle down" lacks a universally understood meaning. Smetters says the idea of tax breaks for the rich eventually producing benefits to the poor has never been part of supply-side economics.
q=In 1981, when President Ronald Reagan lowered marginal tax rates, his main purpose was to drop the top rate from 70 percent to 50 percent ... But it was important not to admit as much, because that would be "trickle-down economics." That was the derisive term Democrats attached to Reaganomics.
...President Herbert Hoover argued that public relief measures proposed by some Demorats were "playing politics with human misery" and that his program was aimed at restoring prosperity to corporations and banks, which supposedly would in turn reinvograte the economy. The Democrats derided this as a "trickle-down theory" aimed at "feeding the sparrows by feeding the horses."
Will Rogers referred to the theory that cutting taxes for higher earners and businesses was a "trickle-down" policy, a term that has stuck over the years.
The philosophy that had prevailed in Washington since 1921, that the object of government was to provide prosperity for those who lived and worked at the top of the economic pyramid, in the belief that prosperity would trickle down to the bottom of the heap and benefit all.
Years ago, this column challenged anybody to quote any economist outside of an insane asylum who had ever advocated this "trickle-down" theory. Some readers said that somebody said that somebody else had advocated a "trickle-down" policy. But they could never name that somebody else and quote them. ... One of the things that provoke the left into bringing out the "trickle-down" bogeyman is any suggestion that there are limits to how high they can push tax rates on people with high incomes, without causing repercussions that hurt the economy as a whole.
Asked whether Truss is promoting the trickle-down theory, [Gillian Keegan, a Foreign Office minister], told BBC Breakfast: "That wasn't actually a message, we don't believe, which is based on our economy … You cannot say what we've done is trickle-down economics. ... She added: "There's no way you could describe our approach as trickle-down."
We find that major tax cuts for the rich push up income inequality, as measured by the top 1% share of pre-tax national income. The size of the effect is substantial: on average, each major tax cut results in a rise of over 0.7 percentage points in top 1% share of pre-tax national income. The effect holds in both the short and medium term. Turning our attention to economic performance, we find no significant effects of major tax cuts for the rich. More specifically, the trajectories of real GDP per capita and the unemployment rate are unaffected by significant reductions in taxes on the rich in both the short- and medium-term.
