Trickle down economics is a term that actually originated with an American comedian who was criticising Hoover's government. Over the decades since it was coined there have been fierce debates from both sides of the economic spectrum about its validity and effectiveness.
What is trickle down economics?
It is an economic theory that states exactly what its name suggests; that wealth trickles down from the wealthy at the top, to the benefit of society below. More accurately, that tax breaks for the wealthy and corporations will have a beneficial effect on everybody else, as those tax breaks will stimulate economic growth.
Rich people will have more money, they will pump more into the economy through personal spending, and if they own businesses they will have more money to create both jobs and goods. They will pay more in wages, and the average Joe will have more money to spend because of it. This extra economic growth will eventually create enough revenue to cover the deficit left by the tax cuts.
Used by Presidents such as Herbert Hoover during the Great Depression, and Ronald Regan, it is a policy that has often been used in order to try and reboot a weak economy. In the UK, Margaret Thatcher was also an avid supporter.
However, as noted by The Guardian, if the world’s wealthiest 85 people have as much wealth as the world’s poorest 3.5 billion, then wealth is clearly failing to ‘trickle’.
Why does it not work in practise?
The main draw back of trickle down theory is that it is a political theory, not a mathematical one. Used by those in power to secure votes, trickle down economic policies overwhelmingly move an economy’s wealth towards those who already are wealthy.
Proponents of the theory point to the Laffer curve as proof that tax cuts can increase government revenue.
The curve shows that if tax rates are increased to 100% then the government earns no money because there is no incentive to work. Equally, if the tax rate is 0% then the government also earns no income. Essentially the curve states that taxes need to fall somewhere between 0% and 100%, although economists are yet to agree on this exact sweet spot. The issue with the curve of course, is that it is too simplistic. It assumes that the only (or the major) effect on government revenue are taxation rates alone, and fails to take other variables into account. It paints an incomplete picture of cause and effect.
In fact, there is a distinct lack of empirical data that correlates an increase in government revenue with cutting top rate tax. Indeed, back in 2015 five of the IMF's top economists released a report saying that the theory should be abandoned all together.
Trickle down economics today
The appeal of cutting taxes is that its effects are fast and easy to see. People with more money in their pockets spend more, theoretically. However, if we look at recent data from the UK, numbers show that by 2023-24 the tax benefit packages put forward by the British Government since 2015 will have provided more benefit for the richest fifth of households than the poorest. According to the Guardian,
“The overall package of tax and benefit changes announced since 2015 will deliver an average gain of £390 for the richest fifth of households in 2023-24, the thinktank found, compared to an average loss of £400 for the poorest fifth.”
In fact, according to the Office of National Statistics, income inequality actually rose at the end of the 2018 financial year, from 31.4% to 32.5%.