The fallacy of trickle-down economics
In 1974, economist Arthur Laffer drew a graph for Dick Cheney, showing him the relationship between tax rates and revenues. That Laffer curve became the underpinning “logic” for the Republicans’ love affair with what is called “trickle-down economics,” where the lower taxes to corporations would incur greater profits that would “trickle down” to the company’s employees.
Or so the theory went.
Enter reality. Ronald Reagan signed the Kemp-Roth tax bill in August 1981. That bill reduced taxes across the board by 25 percent. The result: In one year’s time, the deficit had ballooned, interest rates shot from 12 percent to 20 percent, the economy dropped into the second hole of the double-dip recession of 1978-1982, and the Dow Jones cratered from over 1,000 down to 770. GDP dropped 6 percent.
One year later, somewhat desperately, Congress passed and Reagan signed the Tax Equity and Fiscal Responsibility Act, which reversed the lion’s share of the original Kemp-Roth provisions. Within weeks of the enactment of TEFRA, (actually the largest tax increase since World War II), the highly touted “Reagan Recovery” started. This is hardly an indicator that tax cuts stimulate the economy and tax increases stifle it.
Fast-forward to the Clinton years. Clinton signed into law an 8.6 percent increase in the top income bracket. The economy boomed. George W. Bush lowered taxes again, and again, the economy tanked. Does this mean that tax rates have a direct relationship with the economy, rather than the inverse relationship that supply-siders insist? No, it doesn’t. With the historical examples given, a more realistic conclusion would be that taxes simply do not have the large effect on the economy that conservatives believe they have. These recent historical examples do, however, solidly discredit the standard Republican argument for trickle-down economics.
Now, we are faced with yet another attempt at this failed economic policy — the current tax bill. The definition of insanity is trying the same thing over and over and expecting a different result. That curve should have really been named the laughable curve.
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