Does Trickle Down Economics Work?


In 1981, Ronald Reagan took office and began instituting trickle-down economics.  The Democratic controlled House cut the marginal tax rate on the highest income tax bracket from 70% to 28% and made similar cuts in capital gains, corporate income tax, and various excise taxes. These policies were continued for the most part by the ensuing administrations.

According to the theory of supply-side economics, the rich would start spending more, and this would increase employment and wages for the poor, so everyone would be better off.

Opponents countered that the rich would simply invest the windfall, or spend it on goods produced overseas, yielding a net loss for the U.S. economy.

It has now been 30 years, so how has it turned out?

Actually, quite badly.

According to this chart from the Center on Budget and Policy Priorities, during the post-war period 1945-1980, the both the rich and the poor benefitted from the expansion of the U.S. economy. However, since Reaganomics went into effect the average income of the richest top 1% has almost tripled while the income of most of us (in the bottom 90%) has actually declined.

The “Bush tax cuts” enacted in 2001 and 2003 lowered the marginal tax rate for the high tax bracket from 39.6% to 35.0%. These tax breaks are set to expire at the end of this year.

Most Republican favor extending these tax breaks. Most Democrats favor making the tax breaks permanent only for the first $250,000 of annual income. What do you think?

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