No economics textbook contains a trickle-down economics
theory, but numerous historians and innumerable politicians and journalists say
it never worked. Politicians especially
use it to divert attention from their policies that do not favor job creation
or economic wellbeing.
Trickle-down theory supposedly provides tax cuts favoring
the rich in hopes the additional money will stimulate the economy and trickle
down to the middle and lower class.
Actually the tax cuts are to generate for the government additional
revenues, and that can be measured to determine success. The idea is to change
behavior of the higher taxed citizens by enticing their investments out of tax
shelters such as municipal bonds.
For example, in 1916, 206 taxpayers filed as earning more
than $1,000,000. By 1921, the highest tax bracket grew to 73% to pay down the
debts from World War I, but the number of taxpayers reporting over $1,000,000 fell
to just 21. During this period, taxpayers reporting over $300,000 dropped by
four-fifths.
President Wilson and his Secretary of the Treasury Glass
both encouraged Congress to reduce the rates to increase revenues, but to no
avail. In the next administration, Secretary of the Treasury Mellon initially
requested Congress remove Municipal Bonds from their tax-exempt status, but Congress
wouldn’t budge. Mellon, then, requested they reduce the tax rates which they
did, lowering the upper bracket to 24% by 1924.
In 1925, 207 taxpayers filed incomes over $1,000,000. Tax
revenues virtually doubled and the highest-bracket filers went from paying 30%
of total revenues to 65%. The economy became the “Roaring Twenties,” and
unemployment fell to a low 1.8%.
During 1924 election, two Senators successfully ran on “No
more tax cuts for the rich.” In the 1930s, FDR’s speechwriter Rosenbaum
vilified Mellon for cutting taxes for the rich, and that charge has been
repeated by historians who apparently cannot tell the difference between rates
and revenues. Mellon stated that the rate cuts were to get the rich to pay a
share of the revenue needs, and he asked Congress to eliminate a movie theater
tax because it fell heavily on the middle and lower classes.
The rate cut dramatically and demonstrably fulfilled their
purposed of increasing federal revenues, and brought investments by the rich
back into creating and expanding businesses which increased economic
performance for everyone. Those who say otherwise are either ignorant or liars.
Cutting rates also worked during the 1960s. John Kennedy
reduced highest bracket from 90%. In the 1980s, Ronald Reagan reduced rates
from 70%. Federal revenues increased both
times dramatically, and the economies of those periods prospered.
In this election, a Democratic strategist has openly talked
of increasing the highest bracket from 39% to 83%. With individual alternatives
now globally available, this will not increase revenues. Further, our corporate
tax rates are already the highest in the world, and corporations have an even
easier time moving profits offshore.
Raising rates to get more revenues doesn’t work, except
perhaps in getting elected.
