Mike Rosen Column November 30, 2008

'Trickle-down economics’ is a myth created by Democrats

“For eight years, we’ve been told that the way to a stronger economy was to give huge tax breaks to corporations and the wealthiest Americans, and somehow prosperity would trickle down.” So intoned Barack Obama in a campaign ad.

Really? And who told us this? Certainly not Republicans or proponents of supply-side economics, from which the epithet “trickle-down economics” was dishonestly contrived by Democrats.

An earlier form of this liberal cliché can be traced back to William Jennings Bryan’s infamous 1896 “Cross of Gold” speech: “There are those who believe that if you will only legislate to make the well-to-do prosperous, their prosperity will leak through on those below.”

Leak through or trickle down — same difference. Bryan was a populist demagogue, a practitioner of the politics of envy, which latter-day Democrats have raised to an art form.

Supply-side economics is based on the understanding that prosperity is ultimately dependent on productivity and output. And that the way to stimulate more of that is to create incentives for productive enterprise. Lower rates of taxation for everyone on work, savings and investment encourages these very things; higher tax rates discourage them.

Defaming supply-side economics contemptuously as “trickle-down” has been a Democratic standby for years, with one notable exception. After John F. Kennedy was elected president in 1960, he persuaded Congress to reduce the confiscatory top marginal tax rate, then 90 percent, down to a mere 70 percent. In a speech to the Economic Club of New York in 1962, JFK explained: “In short, it is a paradoxical truth that tax rates are too high today and tax revenues too low — and the soundest way to raise revenues in the long run is to cut tax rates now.”

Under the Kennedy tax-rate cuts, as predicted, revenues grew. Twenty years later, when tax rates were cut even more under Ronald Reagan, federal tax revenues again soared with the “rich” paying an increasingly greater share of the income tax burden. Since it was now a Republican initiating this policy, Democrats branded it “Reaganomics” and mocked it as half-baked, “trickle-down” economics.

In fact, it’s simply common sense. It applies to all facets of commerce. Think of a department store, for example. When the store wants to make more money it doesn’t raise its prices, it advertises a sale and cuts them. The store might make less money per unit sold, but by stimulating the volume of economic activity it increases its profits. Lower tax rates are a sale on economic enterprise.

This common-sense concept was understood as far back as the 14th century, when the Arabian philosopher Ibn Khaldun observed that, “the strongest incentive for cultural activity is to lower as much as possible the amounts of individual imposts levied on upon persons capable of undertaking cultural enterprises.”

In Federalist No. 21, Alexander Hamilton echoed this same theme, arguing that taxes “prescribe their own limit; which cannot be exceeded without defeating the end proposed — that is, an extension of the revenue ... If duties are too high they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds.”

It’s ironic that liberals smugly ridicule this proposition when even their ideological icons have endorsed it. Icons like John Maynard Keynes, economic godfather to FDR’s New Deal, who in his 1933 tract, “The Means to Prosperity,” wrote, “taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget.”

“Trickle-down” economics has become the knee-jerk, liberal expletive to demean tax incentives that reward individual effort and success. Their simple-minded notion of capital formation is not of entrepreneurs creating jobs but of fat cats getting rich and throwing a few crumbs at exploited laborers. They don’t much understand or care for capitalism, and like capitalists even less.


Mike Rosen writes a weekly column for the Rocky Mountain News. His radio show airs weekdays from 9 a.m. to noon on 850 KOA.


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