Trickle-down Economics Must Die

“Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively be created by lowering barriers for people to produce (supply) goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. According to the theory, consumers will then benefit from a greater supply of goods and services at lower prices. Typical policy recommendations of supply-side economics are lower marginal tax rates and less regulation.” [1]



Reagan outlines his tax reduction plan in 1981

Also known as “trickle-down economics”, its advocates believe that by providing tax cuts and benefits to businesses and wealthy individuals, their benefits will trickle-down to the middle-class and poor. On the surface, it sounds reasonable and it certainly appeals to wealthy Americans, Tea Party members, and others who spend their time trying to figure out ways to avoid their patriotic duty of paying taxes. There is only one problem with it is: IT DOESN’T WORK!

Ronald Reagan espoused it in the 1980’s and “Reaganomics,” as it was called, resulted in the ballooning of the national debt. At first, George H. W. Bush (1989-1993) criticized Reagan's supply-side policies calling them "voodoo economics." Later, when he became President, he tried to continue this disastrous policy (“Read my lips”) until the economy tanked so badly that he was finally forced to raise taxes.

Bill Clinton (1993-2001) restored economic sanity by raising taxes early in his first term. The Omnibus Budget Reconciliation Act of 1993 raised taxes on the wealthiest 1.2% of taxpayers, while cutting taxes on 15 million low-income families and making tax cuts available to 90% of small businesses. Despite passing Congress without a single Republican vote, and without any support from Big Business, or wealthy Americans, the Omnibus Budget Reconciliation Act resulted in decreased public debt and Americans enjoyed the longest-running business cycle expansion in our history.

In addition, Clinton managed to resist temptation and kept us out of those cowboy macho Iraq/Afghanistan-type wars that, according to a Congressional Research Service report, has cost well over 1.3 trillion dollars since 2001.



Clinton, President Barack Obama and Advisor Valerie Jarrett

 With the election of George W. Bush (2001-2009), “supply-side economics” made its return with a vengeance. Eschewing any particular name and with the rational that tax cuts would stimulate the economy and create jobs, Bush  presided over one of the largest tax cuts in U.S. history. In his 2001 State of the Union Address, Bush estimated that there would be a $5.6 trillion surplus over the next ten years but by the end of his second term, the United States was wallowing in the worst financial crisis since the Great Depression.

Many expected that Democrat Barack Obama would be guided by Clinton’s clear-cut blueprint for economic success putting America back on solid footing and getting us out of the Bush quagmires of Iraq and Afghanistan. In what can only be described as mind-boggling Barack has decided to stick with the Republican formula for failure. In one of the biggest overstatements since Bush’s 2003 "Mission Accomplished" statement, spokesman for the President Jay Carney recently stated, “The economy is vastly improved from what it was when Barack Obama was sworn into office as President.” According to Heritage Action for America “Unemployment has increased by 1.4 percentage points since President Obama was inaugurated, from 7.8% to 9.2%. 2.5 million more people are out of work now than when President Obama was campaigning. Oh, and there are millions more who have given up looking for work altogether. Not to mention the fact that 1 in 3 unemployed persons have been out of work for over a year!”

Worse yet, many Americans continue to believe that the only way out of our economic death spiral is even more tax cutting. This is like trying to save the Titanic by cutting another hole in the hull expecting that the water will flow out. Americans cannot seem to understand that tax cuts result in public workers (teachers, police, firefighters) losing their jobs. This results in less tax revenue which necessitates more tax cutting → firing more workers → less tax revenue → more tax cutting …

Figure 1 illustrates the different tax amounts under the demand side economics [2] of Clinton vs. the supply side economics on George W. Bush. The question facing Americans is: which one would you rather have? For the single person making $30,000 per year: would you rather pay $401.25 more per year in taxes and have a job, or be out of work? For a married couple with an income of $60,000 per year: would you rather pay $1,072.50 more per year in taxes and have your house, or lose your house? How about the married small business owners making $125,000 per year: Would you rather pay $3,964.00 more per year in taxes and have a thriving small business, or see your small business go under?

Of course, Big Business and wealthy Americans do not have to make these decisions. They can sit back and laugh at those in favor of cutting taxes, lose their jobs, lose their homes, lose their small businesses, and see their lifetime dreams go down the drain in the artificially created economic disaster of the last ten  years.

Figure 1: Comparing Income Taxes under Bill Clinton and George Bush

Individual Income Tax Due in 2008,
Bush Law versus Clinton Law

For taxpayers who take the standard deduction and have no children
Taxpayer Tax That Would Have Been Owed under Clinton-Era Tax Law Tax Owed under Current Law, with Bush Tax Cuts

Tax Plan	Clinton	Bush
Single, income of 30,000	$3,157.50	$2,756.25
Single, income of 50,000	$7,262.50	$6,606.25
Married, income of $50,000	$5,085.00	$4,012.50
Married, income of $60,000	$6,585.00	$5,512.50
Single, income of $75,000	$14,262.50	$12,856.25
Married, income of $75,000	$9,426.50	$7,762.50
Single, income of $125,000*	$29,378.50	$26,472.25
Married, income of $125,000*	$23,426.50	$19,462.50

*This chart does not take into account the Alternative Minimum Tax

1. Wanniski, Jude (1978). The Way the World Works: How Economies Fail—and Succeed. New York: Basic Books
2. Demand-side economics is an economic theory which suggest that economic stimulation comes best from increasing the demand for goods and services. Also called Keynesian economics, after John Maynard Keynes, this concept is usually placed in direct opposition with supply-side economics, which suggests that stimulation is achieved through increasing the supply of goods and services.