Trickle-down economics reliably works

What we know

'Trickle-down economics' describes the argument that reducing taxes on businesses, investors, and high income earners encourages investment and job creation that ultimately benefits lower and middle income workers as the gains flow through the economy. It gained prominence as a rationale for tax policy in the United States starting with the Reagan administration in the 1980s and has recurred in tax debates since, including the 2017 Tax Cuts and Jobs Act.

A major 2020 study by David Hope and Julian Limberg of the London School of Economics, examining major tax cuts for the rich across 18 OECD countries over roughly 50 years, found that these cuts had no significant effect on economic growth or unemployment, but did significantly increase income inequality, essentially finding evidence for the redistributive effect of trickle-down tax policy without the promised growth benefit. This is one of the most comprehensive cross-country empirical tests of the theory to date and its findings are broadly consistent with earlier, more limited studies.

Analysis of the 2017 Tax Cuts and Jobs Act by the Congressional Research Service and other nonpartisan bodies found limited evidence that the corporate tax cuts, which reduced the federal corporate rate from 35 percent to 21 percent, produced the promised surge in wages or business investment; much of the resulting cash was directed toward stock buybacks and shareholder dividends rather than substantial new capital investment or broad wage increases, according to Federal Reserve and Treasury Department data tracking corporate cash use in the years following the law's passage. Similarly, an often-cited real-world test case, Kansas's 2012 tax cuts under Governor Sam Brownback, which sharply reduced income and business taxes on the promise of a growth boost, led instead to significant state revenue shortfalls, credit rating downgrades, and cuts to education and infrastructure funding, without the promised employment surge materializing; the state legislature substantially reversed the cuts in 2017.

The theory retains a coherent underlying economic logic, in some circumstances, particularly capital-constrained small businesses, lower marginal tax rates probably do influence some investment decisions, and mainstream economists broadly agree taxes affect incentives at the margins. The dispute is about magnitude and distribution: whether cuts targeted at top earners and corporations produce enough investment and wage growth to offset the direct increase in inequality and lost public revenue, and the accumulated empirical evidence across decades and multiple countries suggests they generally do not, at the scale advocates have historically claimed. This is why economists across the political spectrum, including some conservative-leaning economists, have grown more skeptical of strong trickle-down claims even while continuing to debate optimal tax rates on narrower, more technical grounds. The International Monetary Fund's own research department published analysis in 2015 reaching similar conclusions to the LSE study, finding that increased income shares for the wealthiest households were associated with lower subsequent economic growth, while increased income shares for the poorest 20 percent were associated with higher growth, a finding the IMF authors described as inconsistent with trickle-down assumptions.

Common claims

• Tax cuts for the wealthy reliably create jobs for everyoneNot supported. LSE research over 50 years in 18 countries found no significant effect on GDP or unemployment.
• The Reagan tax cuts proved trickle-down economics worksContested. Economic growth in the 1980s coincided with other factors including oil price drops and loose monetary policy after 1982.
• High top marginal tax rates always damage economic growthNot supported. U.S. economic data shows no consistent correlation between top tax rates and GDP growth over seven decades.

Evidence hierarchy

All sources

• Economic consequences of major tax cuts for the richDavid Hope and Julian Limberg, London School of Economics International Inequalities Institute · 2020
• Congressional Research Service reports on the Tax Cuts and Jobs ActCongressional Research Service · 2019
• Kansas's Tax Cut ExperimentCenter on Budget and Policy Priorities · 2017
• Federal Reserve and Treasury data on corporate buybacks post-TCJAFederal Reserve Board · 2019

Related terms