Affluent people and trickle-down economics

October 29, 2012

When the latest republican president, George W.Bush encouraged people to go shopping and introduced massive tax cuts on corporations and the wealthiest he acted as perfect role model for conservative economic politics. Mitt Romney is now running for president by promoting the same ideas and further tax cuts

These conservative policies are often justified by recourse to “trickle-down economics,” the idea that tax breaks or other economic benefits provided by the government to businesses and the wealthy will result in further investment by the rich, leading to more jobs and hence benefiting the poorer members of society. But does money really trickle down? The following two studies provide food for thought on that question.

Thomas L. Hungerford, specialist in Public Finance recently published a study called “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945″, where he examines a 65 year period and tests whether or not the introduced tax cuts do indeed lead to economic growth.

Here are his concluding remarks:

The top income tax rates have changed considerably since the end of World War II. Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The average tax rate faced by the top 0.01% of taxpayers was above 40% until the mid-1980s; today it is below 25%. Tax rates affecting taxpayers at the top of the income distribution are currently at their lowest levels since the end of the second World War.

The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.

However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.

Or in other words, the historical data reveals a trend that is pretty much the opposite of what trickle-down economics suggests. 

Here is another study, done at the University of California (Berkeley), called Class, Chaos, and the Construction of Community, providing insight into the most likely behavior the wealthiest show during times of chaos and crisis. It might hold at least part of the answer to that question of why wealth does not seem to trickle down.

The original abstract reads as follows:

Chaotic conditions are a prevalent and threatening feature of social life. Five studies examined whether social class underlies divergent responses to perceptions of chaos in one’s social environments and outcomes. The authors hypothesized that when coping with perceptions of chaos, lower class individuals tend to prioritize community, relative to upper class individuals, who instead tend to prioritize material wealth. Consistent with these predictions, when personally confronting chaos, lower class individuals were more communally oriented (Study 1), more connected with their community (Study 2), and more likely to volunteer for a community-building project (Study 3), compared to upper class individuals. In contrast, perceptions of chaos caused upper class individuals to express greater reliance on wealth (Study 4) and prefer financial gain over membership in a close-knit community (Study 5), relative to lower class individuals. These findings suggest that social class shapes how people respond to perceptions of chaos and cope with its threatening consequences. (PsycINFO Database Record (c) 2012 APA, all rights reserved)

And here’s a quote from Paul Piff, the lead author of the study:

In times of uncertainty, we see a dramatic polarization, with the rich more focused on holding onto and attaining wealth and the poor spending more time with friends and loved ones.

I would say, these two studies provide pretty strong evidence that trickle-down economics is not just nonsense but very harmful to society.

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