““Trickle-down economics”, also referred to as “trickle-down theory”, is a populist political term used to characterize economic policies as favoring the wealthy or privileged.” –Google definition.
I appreciate the idea that one of the primary duties of a search engine is to provide concise definitions for their customers. I do not fault Google for what I consider an incomplete definition. To my mind the ideal definition of the term would be the following: ‘Trickle-down economics’, also referred to as ‘trickle-down theory’, is a populist political term used (primarily by opponents) to characterize economic policies (with which they disagree) as favoring the wealthy or privileged.’ (Those that helped to write the definition of the term, for Wikipedia, have included the first (“primarily by opponents”) parenthetical addition.)
I realize that, in some ways, these additions might result in the perception that the search engine is taking a side in the argument, but as economist, Dr. Thomas Sowell, writes in his book Basic Economics, the term “trickle-down” is not a proper characterization of the laissez-faire, supply-side economists view that favors freeing up markets. Their goal, attained through a lowering of regulations on business, a lower capital gains tax, and a lower corporate tax rate, would not provide benefit specific to the wealthy or privileged, as much as it would all enterprising risk takers, regardless of their income.
One of the biggest myths that those overwhelmed by the intricacies and complexities involved in understanding economic theory buy into is that an increased tax rate always leads to more revenue for the government. It seems like simple math to suggest that if the government taxes a corporation one percent on 100 million of their profit, the government will receive one million dollars, two percent equals two million, and the higher the tax rate the more a government receives to then redistribute accordingly. This is what economist Arthur Laffer has characterized as an “arithmetic effect”.
What the arithmetic effect does not account for is the effect high taxes have on the amount of taxable activity that occurs. Economist Arthur Laffer points out that everyone knows that if you tax a corporation 0%, the government will receive 0% in revenue. What may not seem as logical on the face of it is, if the government taxes a corporation 100%, the government will also receive 0% in revenue, because the taxed individual, or corporation, will begin to lessen their activity to avoid greater taxation.
What this illustrates, by means of exaggeration, is that there are points in between at which companies, and individuals, decide that it doesn’t make good business sense to continue to engage in taxable activity, at full capacity, if the tax rate on that activity is too high. There is a point in between, suggests Laffer, a point that some now call the Laffer Curve, that suggests that there is a sweet spot in the tax rate that encourages greater taxable activity, broadens the tax base by encouraging greater employment, and can end up resulting in greater revenue for the federal government.
If the supply-side argument were solely concerned with a “trickle-down” effect, one would think that they would be obsessed with the rich keeping more of their money. If that were the case, the supply-side argument might suggest that the tax rate should be as low as possible. They might even suggest that the tax rate should be 0%, or a single-digit tax-rate. That is not the argument that Laffer, Sowell, or any supply-side economists make. Rather, they call for a tax rate that encourages greater economic activity that they believe will result in more taxable activity that they believe should result in more revenue for the government. If they directed their sole focus at the rich keeping more of their money, their theories would focus more on the federal income tax rate. What they are more concerned with is lowering the corporate tax rate, the capital gains tax, and lessening burdensome government regulation to allow for a more stratified economy by encouraging more middle class investment and risk taking. The middle class risk takers comprise a large percentage of employers of our society, and most of them are not successful in their efforts, much less wealthy. The politicians that state that they need to create jobs for Americans rarely do anything for these employers.
Warren Buffett and the Already Wealthy
Ask any wealthy, or privileged, individual about paying taxes, and they will inform that inquisitive person that they don’t mind paying taxes, that they’re not paying enough in taxes, or that they think they should be paying more. The listener cannot help but consider such an answer to be wonderful, altruistic, and patriotic. What Warren Buffett will not add is that paying more in taxes will not hurt him, because he already has his money, and he doesn’t mind paying as many taxes as he could possibly pay, until the IRS tries to collect those taxes, and Warren Buffet takes them to court and succeeds in keeping more of his millions.
A person like Warren Buffett may have been for lower taxes, decreased regulations, and a lessened role of government in the economy when he was starting out, but it no longer benefits him in the manner it may the enterprising risk taker that deigns to compete with one of the blue chip companies in which Warren Buffett owns stock. The already wealthy and privileged few –like Warren Buffett– would be more apt to encourage federal regulators to regulate and tax the industries of the companies from which he has shares. In doing so, a wealthy and privileged type like Warren Buffet hopes the government can help him diminish current competitors and drive away any future risk takers that might aspire to compete with a Wells Fargo, IBM, Coca Cola, or any of the other big, blue chip companies in which he owns shares. Yet, any time Warren Buffet appears on TV, everyone is surprised to hear him sound more like Barack Obama than Ronald Reagan did. Why wouldn’t he, I want to shout, he already has his.
The Straw Man Argument
Some trace the term “trickle-down economics” to the humorist, Will Rogers, and his attempts to demonize the policies of President Herbert Hoover for the benefit of the Franklin D. Roosevelt campaign. Those, in certain circles, use the term now to voice opposition to such theories, as a straw man argument of what the other side believes.
As Thomas Sowell writes in his book Basic Economics:
“No recognized economist of any school of thought has ever had any such theory (Trickle Down) or made any such proposal. It is a straw man. It cannot be found in even the most voluminous and learned histories of economic theories.
“What is sought by those that advocate lower rates of taxation or other reductions of government’s role in the economy is not the transfer of existing wealth to higher income earners or businesses but the creation of additional wealth when businesses are less hampered by government controls or by increasing government appropriation of that additional wealth under steeply progressive taxation laws. Whatever the merits or demerits of this view, this is the argument that is made – and which is not confronted, but evaded, by talk of a non-existent ‘trickle down’ theory.
“Whether in the United States or in India, and whether in the past or in the present, ‘trickle down’ has been a characterization and rejection of what somebody else supposedly believed. Moreover, it has been considered unnecessary (by opponents) to cite any given person who had actually advocated any such thing.
“The real effect of a reduction in the capital gains tax is that it opens the prospect of greater future net profits and thereby provides incentives to make current investments that create current employment.”
If one were to corner me in a supermarket and ask me about supply side economics, based on the curve that Arthur Laffer reintroduced to the world, that opponents call trickle-down economics, I might have conceded to the idea that those that formed the economic theory intended it to favor the wealthy and industrial types first. I believed that those that believed in the theory stated that the fruits of this process would pinball its way down. Even back then, back when I thought it was a decent theory on its face, I didn’t think it made sense. How does one answer for the argument that in a trickle down economy, the idea of greed counters the idea that the money will ever find its way to the worker.
The answer is that our economy is more stratified, and a stratified economy calls for the success of the businesses across all classes, and when the government steps in with its invisible hand to determine winners and losers, it messes up that dynamic by crushing the little guys first. Thomas Sowell would say that even that is a fundamental misreading of the manner in which economic processes work.
“Economic processes work in the directly opposite way from that depicted by those that imagine that profits first benefit business owners and that benefits only belatedly trickle down to workers.
“When an investment is made, whether to build a railroad or to open a new restaurant, the first money is spent hiring people to do the work. Without that, nothing happens. Even when one person decides to operate a store or hamburger stand without employees, that person must first pay somebody to deliver the goods that are being sold. Money goes out first to pay expenses and then comes back as profits later – if at all. The high rate of failure of new businesses makes painfully clear that there is nothing inevitable about the money coming back.
“Even with successful and well-established businesses, years may elapse between the initial investment and the return of earnings. From the time when an oil company begins spending money to explore for petroleum to the time when the first gasoline resulting from that exploration comes out of a pump at a filling station, a decade may have passed. In the meantime, all sorts of employees have been paid – geologists, engineers, refinery workers, and truck drivers, for example. It is only afterwards that profits begin coming in. Only then are there any capital gains to tax. The real effect of a reduction in the capital gains tax is that it opens the prospect of greater future net profits and thereby provides incentives to make current investments that create current employment.”
The ignorance of the many (myself included) of the complications inherent in economic theory allows opponents of that economic theory to fragment and frame that economic theory in such a way that they are able to reduce it to a misleading soundbite: Trickle-down economics. I do not think I’m alone when I write that even though Dr. Sowell has a talent for making the complex understandable, the quotes I’ve provided here leave some forms of cerebral indigestion for which rereading is the only remedy. In the midst of such confusion, opponents step in to provide relief from this confusion, and arduous reading, by giving us a ‘benefit the wealthy and privileged’ soundbite.
The Big Corporation and Big Government Relationship
One of the methods novices can use to try and understand a complex economic theory, such as that espoused by Dr. Sowell and others, is to understand what it is not. What is the opposite of lessened regulations, and lower business specific taxes? Some call it Keynesianism economics. Keynesian economists often call for government intervention in times of crisis (i.e. recession or depression). Keynesians often call for “work ready jobs”, and what others call “shovel ready jobs”. Opponents characterize these jobs as one group of employees digging a hole, while another group covers that hole. The short-term purpose of such jobs is to get us over the short-term, temporary, bump of a failing economy. The problem that results from these temporary, short-term resolutions is that when government establishes a role in the economy, for emergency purposes, it rarely rolls those temporary measures back when the emergency has been resolved, as most politicians will not concede that an emergency, which voters elect them to fix, is ever resolved.
This ends up establishing a greater, and more accepted involvement of the government in the economy. Big Corporations hire accountants and lawyers to help them learn how to survive in this environment, and then the accountants and lawyers teach the Big Corporations how to thrive in this environment, until a mutually beneficial relationship is established. The Big Corporations tend to grow in size, in conjunction with the size of government, in an incestuous relationship that creates a climate some call crony capitalism. Some may find this hard to believe, but Warren Buffett, his blue chip companies, and all of those listed in the Dow actually favor more regulations, higher corporate tax rates, higher capital gains rates, and a larger role of federal government in their respective industry.
‘Why would a Big greedy Corporation call for more taxes, more regulations, and more complications within their own industry? Doesn’t that affect their profit margin?’ The answer lies in fine print of the reason that there are now more millionaires in Washington D.C., per capita, than in any other place in the United States. It is also the answer to the question how an indicator of the health of an economy, such as the Gross Domestic Product (GDP), can continue to grow at an anemic rate while the stock market soars to record levels. Crony capitalism results in Big Corporations (and their lobbyists) joining hands with government officials (and their agencies) to pass onerous regulations and high corporate tax rates on an industry. The result is that the rich companies in that industry can get richer and the poor get poorer, and this creates a truer form of what we could more appropriately call trickle-down economics with the government at the top.
When the Food and Drug Administration (FDA) recently passed regulations on E-Cigarettes, or Vapor cigarettes, for example, they did so in a manner that should have shocked those that loathe corporate America and favor regulating Big Corporate America in a way that they believe, somehow, benefits everyone else. The FDA regulations actually ended up favoring the Big Three Corporations in the smoking industry, or those that have the means, and the set aside money, to comply with all of the FDA regulations and the resultant applications. The Little Guys that attempted to establish brand names in the industry, and carve out their own niche, will eventually be unable to afford these expenses and still turn a profit on the product, so the Big Three will be the only ones left that can afford to sell and distribute E-Cigarettes and Vapor cigarettes. Why would these Big Three corporations do this, if they are already in the E-Cigarettes segment of the market, but not dominating it yet, or if they are not already in the market, but they have plans to be? They were utilizing Big Government regulation and taxation to crush the little guys in their industry. The very definition of what some politicos call crony capitalism.
Some may say that the FDA’s regulations in the E-Cigarette, or Vapor cigarette, industry may have inadvertently helped the Big Three in their plans to dominate this segment of the industry. They would add, however, that the primary goal of the FDA was to help the consumer understand that E-cigarettes and Vapor cigarettes either contain toxins that are harmful to their health, or that the companies in the industry must prove that they don’t, and they must warn the public if they can’t. In the case of this particular FDA regulation, however, Michael Siegel writes that there were alternatives to protect the consumer in the ways the FDA stated that these regulations would, but that the FDA chose the most the route most beneficial for the Big Three. One could deduce, based on the particulars of the regulations listed in Siegel’s piece that the FDA acted in a manner that the Big Three’s lobbyists called for, as these regulations helped the Big Three crush the little guys in the segment in such a manner that will leave the Big Three as the sole competitors.
Long story short, a bunch of little guys gathered and carved out a niche in an industry that the Big Three had some difficulty dominating. The Big Three grew weary of the competition in that industry, and they “secretly negotiated” with advocacy groups and lobbyists to help form the legislation.
As a spokesman of Altria, the biggest of the Big Three, Brian May, stated:
“(Altria) did support FDA extension of authority over e-cigarettes and other tobacco products. Our goal is to be a leader in vaping space.”
“In terms of what they’re trying to do, (tobacco companies) want to limit competition and encourage the cartelization of their markets,” Jonathon H. Adler, the author of the “Baptists, Bootleggers” article, wrote in an email. “They want regulation of e-cigarettes because it lessens the competitive threat to traditional cigarettes and because it makes the remaining e-cigarette market something that’s easier for them to dominate.”
Some are also suggesting that the manner in which the Big Three in this industry conspired with the government to take over the E-cigarette segment of the business, lays a road map for how they will take over the marijuana industry if that product achieves legalization in the United States.
So the next time a powerful politician suggests that “trickle-down economics” does not work, remember that is in their best interests to mischaracterize the supply-side economic theory, without informing their audience of the particulars of that theory. Also, keep in mind that if their theory on economics continues to prevail, the government will remain atop the various industries in this country. The politician will be in a seat of power that will continue to allow that politician to “trickle-down” benefits in all the ways listed above, and in the form of taxpayer subsidies, bailouts, and no-bid contracts that benefit the corporations that meet the politician’s political bullet points.
Also, remember if supply-side economists had their way with the government’s economic policies, the regulations and tax code would have appeal that is more comprehensive for those individuals (little guys) that aspire to take a risk in our economy. The intended result would be greater prosperity among all economic classes. The method of doing so would involve removing the roadblocks that Big Corporations hire accountants and lawyers to help them avoid. The intended result would also involve freeing up of middle class risk takers in a manner than should result in a broader tax base, more diverse forms of employment for individuals across economic classes, and it should end up resulting in more money in the coffers of government.
The opponents have learned, however, that the best way to pettifog an issue is to get out in front of it, and proactively define the debate in question. When a person defends their personal motivations on an issue by saying it’s not about the money, the first thing the listener knows is that it’s all about the money. On a similar note, when a politician allocates tax payer’s hard earned dollars –in the form of tax payer subsidies– to one company in an industry, and they say it’s not about picking winners and losers, the listener can be assured that it’s all about picking winners and losers. That particular company just managed to hit most of the politician’s political bullet points, and he or she began transferring wealth to the company in a form of trickle-down economics in which the politician was standing alone at the top of the pyramid flexing their muscles for the rest of corporate America to witness.
I don’t know what the goals of other side of supply-side economics were hoping to accomplish in their end game, but I would guess that most honest businessmen now find it disgusting to watch their fellow businessmen panhandle government officials into drowning their competition in legal red tape, onerous regulations, and tax rates. I would think that most honest businessmen would, at least consider the practice unethical. I’m quite sure that the other businessmen –those declared to be unethical by their peers– would turn to their friends and say something along the lines of, ‘To succeed in this climate, you need to learn how to operate within it. It’s called crony capitalism.’