What They Tell You

Making the rich richer makes us all richer. When the rich get tax cuts, they invest more, creating jobs and growth. High taxes discourage work and investment. Inequality is the price of growth. The pie has to grow before it can be distributed. As President John F. Kennedy said, “A rising tide lifts all boats.”

What They Don’t Tell You

Trickle-down economics doesn’t work. The evidence shows that tax cuts for the rich don’t boost growth—they just increase inequality. The rich don’t invest their extra income; they save it or spend it on luxury goods. Meanwhile, the poor and middle class spend most of their income, boosting demand. Extreme inequality actually harms growth by reducing consumption, increasing financial instability, and undermining social cohesion.

The Trickle-Down Theory

The basic argument is:

  1. Cut taxes on the rich

  2. The rich invest more

  3. Investment creates jobs

  4. Everyone benefits

This theory was popularized in the 1980s by Ronald Reagan and Margaret Thatcher. It was called “supply-side economics” or, derisively, “trickle-down economics.”

What Actually Happened

Since the 1980s:

  • Top tax rates fell dramatically (from 70%+ to under 40%)

  • Corporate taxes fell

  • Capital gains taxes fell

The result:

  • Inequality soared: The top 1% captured most of the gains from growth

  • Growth didn’t accelerate: Economic growth was actually slower after the tax cuts

  • Wages stagnated: Middle-class incomes barely grew despite productivity gains

  • Debt increased: Governments had to borrow more, and households took on debt to maintain living standards

Why Trickle-Down Fails

The rich save, not invest: When the rich get tax cuts, they don’t necessarily invest in productive activities. They may buy existing assets (driving up property and stock prices), save money offshore, or consume luxury goods that don’t create many jobs.

Demand drives investment: Businesses invest when they see demand for their products. Tax cuts for the rich don’t create demand—they reduce it by shifting money from people who spend to people who save.

The multiplier effect: Money given to the poor circulates more. A dollar given to someone struggling to pay rent will be spent immediately, creating demand. A dollar given to a billionaire might sit in a bank account.

The Evidence

Studies have examined decades of data across many countries:

  • IMF research: Found that increasing the income share of the bottom 20% boosts growth, while increasing the share of the top 20% reduces growth.

  • LSE study: Examined 50 years of tax cuts in 18 countries. Found that tax cuts for the rich increased inequality but did not boost growth or reduce unemployment.

  • US data: The periods of highest growth (1950s-1960s) had the highest top tax rates (over 90%). Growth has been slower since rates were cut.

Inequality Harms Growth

Extreme inequality hurts the economy by:

  • Reducing demand: The poor spend; the rich save

  • Creating instability: Inequality contributed to the 2008 crisis as people borrowed to maintain consumption

  • Undermining education: Unequal access to education reduces human capital

  • Increasing rent-seeking: The rich use their power to extract rather than create wealth

  • Eroding social cohesion: High inequality correlates with crime, health problems, and political instability

What Works Instead

Policies that actually boost growth:

  • Investment in infrastructure and education

  • Progressive taxation to fund public services

  • Minimum wages and worker protections

  • Universal healthcare (reducing business costs and worker anxiety)

  • Support for R&D and innovation

The Real Tide

Kennedy’s metaphor about rising tides was accurate for the post-war period when growth was broadly shared. But since the 1980s, the tide has lifted yachts while leaving dinghies stuck in the mud.

Trickle-down economics is a myth that has been used to justify policies that benefit the wealthy at everyone else’s expense.