When was the trickle down theory created

His background in tax accounting has served as a solid base supporting his current book of business. Trickle-down economics is a theory that claims benefits for the wealthy trickle down to everyone else.

These benefits are tax cuts on businesses, high-income earners, capital gains, and dividends. Trickle-down economics assumes investors, savers, and company owners are the real drivers of growth. Investors will buy more companies or stocks. Banks will increase lending.

Owners will invest in their operations and hire workers. All of this expansion will trickle down to workers. They will spend their wages to drive demand and economic growth. Trickle-down economic theory is similar to supply-side economics.

That theory states that all tax cuts spur economic growth. Trickle-down theory is more specific. It says targeted tax cuts work better than general ones. It advocates cuts to corporations, capital gains, and savings taxes. It doesn't promote across-the-board tax cuts. Instead, the tax cuts go to the wealthy. The benefits trickle down to everyone else. Both trickle-down and supply-side proponents use the Laffer Curve to prove their theories.

Arthur Laffer showed how tax cuts provide a powerful multiplication effect. Over time, they create enough growth to replace the government revenue lost from the cuts. The resulting expanded, prosperous economy provides a larger tax base. But Laffer warned that this effect works best when taxes are in the "Prohibitive Range. If the tax rate falls below the Laffer Curve's prohibitive range, then further cuts won't stimulate economic growth enough to offset the lost revenue.

During the Reagan administration, it seemed like trickle-down economics worked. The administration's policies, known as Reaganomics, helped end the recession. Reagan cut taxes significantly. Trickle-down economics was not the only reason for the recovery, though. Reagan also increased government spending by 2. Most of the spending went to defense. Trickle-down economics, in its pure form, was never tested. It's just as likely that massive government spending ended the recession. President George W.

Bush used trickle-down policies to address the recession. That ended the recession by November of that year. That often occurs because unemployment is a lagging indicator. It takes time for companies to start hiring again, even after a recession has ended. Congress Joint Economic Committee. Accessed Jan. London School of Economics and Political Science.

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We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Economy Economics. What Is Trickle-Down Theory? Key Takeaways The trickle-down theory states that tax breaks and benefits for corporations and the wealthy will trickle down to everyone else.

Trickle-down economics involves less regulation and tax cuts for those in high-income tax brackets as well as corporations. Critics argue that the added benefits the wealthy receive adds to the growing income inequality in the country. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.

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This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Trickle-Down Effect The trickle-down effect is a marketing and advertising term that suggests trends from the upper class will flow down to the lower class. And when President Ford proposed a tax overhaul in , Sen. Edward M. Smetters says the idea of tax breaks for the rich eventually producing benefits to the poor has never been part of supply-side economics.

In fact, many supply-siders argue that lower taxes benefit workers more than capital owners through international capital flows. Whether this argument is right or wrong is a legitimate issue. Semantics aside, most agree that the right kind of stimulus can be efficacious to growth. There are a number of reasons why tax cuts for high earners could theoretically make others better off, he says. The current tax bill is still a moving target, but the Penn Wharton Budget Model finds that the boost to GDP produced by the tax cuts would not be enough to pay for the tax cuts.

Lower taxes will probably add to growth. There are several reasons for that. Some of us will say it is because lower taxes encourage people to work more and maybe corporations to invest more. If the tax cuts are long lived, this will raise national income for a long time.

Republicans tend to start from this point. Indeed, this was the rationale for temporary cuts under President Obama. As I said, most economists agree that each of these arguments has merit. These tend to be higher-income individuals. For an unbiased observer, there really is very little to choose between the fiscal probity of Democrats and Republicans.

I would estimate yes, maybe a little but not very much. Will it encourage investment? Will it encourage corporations to relocate operations to the U.

Maybe, but the details are going to matter a lot. The details of the tax plan are still opaque. One key unknown is the extent to which tax savings might be applied in ways that produce growth.

Inman, Wharton professor of finance. However, investing in a new building or in new capital equipment will employ people and potentially increase worker productivity. In that case there will be a positive effect on employment and on worker wages. If so, the trickle down, the wage premium for those at the lower ends of the income distribution, will be rather modest. Inman recalls the effects of President George W.