So lately we’ve gotten quite a few hits to the Required Reading post linking Thomas Sowell’s article on the myth of trickle down economics. The reason I linked the article is because Sowell does such a great job and anything I would have written would just be his article summarized. The problem with that is, even though everyone should read the whole thing, I know that probably 90% of the people who click the link won’t even read half once they see it is a 19 page PDF. I decided I would take what I consider the most important concept and essentially rewrite it, however, I by no means expect what I write to be as clear and convincing as Sowell, so please take the time and read it.
First of all, there is no economist who ever proposed the “Trickle Down Theory”. I was simply set up by politicians as a straw man. No one ever sat down and suggested if we let the rich keep more of their own money through lower taxes, it will eventually trickle down to the middle and lower class. I have no doubt you have friends that advocate for exactly that, but only because a Democrat says it doesn’t work. They might have read about it in the New York Times, Washington Post, or something Michael Tomasky wrote (that clown wrote this piece), but they definitely did not learn the theory in any respectable book. They are arguing for or against a caricature, not a theory.
We fight for and against not men and things as they are, but for and against the caricatures we make of them. – J. A. Schumpeter
Sowell shows empirical evidence that after tax cuts to all income brackets, revenues to government increase and the rich pay a greater share; both nominally and as a percentage. Part of the reason this happens is because lower taxes increase the incentive for investments in the United States. Those investments become more attractive than they previously were, so less money is invested in countries with better tax law.
Let’s say a billionaire is sitting on the fence about opening a table factory. It is a risky investment to spend millions of dollars to build a factory, buy supplies, hire employees, manufacture tables then sell them. There is no guarantee he will ever make a penny. It is possible that he builds the factory, buys supplies, hires employees, but not enough people buy his tables and he has to close the doors at a loss. That is risky even if there were no taxes, but when the feds steal a percentage of any potential profits, that makes the decision a whole lot riskier. He has to sell even more table to make it worth his investment….So anyway, the government lowers taxes, he pulls some money out of his account in the Cayman Islands and builds a factory.
He hires a construction company to build the building, he sets up contracts for people to supply him wood, he buys tools, supplies, machines, and hires workers. He is in the hole millions of dollars, yet every single person involved in the previous sentence is paid within a reasonable time for their service, goods, or labor…except the billionaire who actually invested the money. He won’t get paid on the investment until he turns a profit. That profit could come in 5 years, it might come in 10 years, or it could never come. But all his blue-collar workers will be paid 2 weeks after they perform their job.
This story does not sound like the money was given to the billionaire and trickled down to the poor, ironically, the blue-collar works are paid before the billionaire. Trickle Down has never been an actual theory, and doesn’t make sense analytically or empirically. Don’t eat everything (preferably anything) that politicians feed you.
Please read the full article.
God Bless Freedom, Liberty, and Personal Property,
Slappy Jones II