Tuesday, March 3, 2009
What "Trickle-Up" Economics will look like
When President Obama released the summary of his first budget for fiscal year 2010 he stated that the past eight years had "once and for all" refuted the notion that the economy can grow by letting wealthier Americans keep more of their earnings, or as Thomas Jefferson called it, "the fruits of their labor."
Of course while Mr. Obama was running for president he repeatedly claimed that we need to grow the economy "from the bottom up" rather than from the top down.
His budget is a fulfillment of his campaign promise to go after those who run our businesses and supply us with the things we want and need by raising the top two income tax brackets while expanding income tax credits to millions of Americans who - hang on to your seats - currently pay no income taxes.
How, you might ask, can you cut taxes for people who pay zero taxes? It is simple. If you are a poorer American who has a job you qualify for what the government calls the Earned Income Tax Credit. After taking your legal tax deductions to bring your income tax obligation to zero you then get a check - from the earnings of other taxpayers - on top of that. In effect you receive a welfare payment for getting up and going off to serve your fellow man.
Under the Obama budget he will give even more people a tax credit which will, according to estimates, lead to almost 48% of all Americans owing no federal income taxes at all. 52% of us would shoulder the burden for the more than $3.5 trillion budget he has envisioned for our nation.
Under his "trickle up" economics theory, by creating even fewer taxpayers at the bottom rung of the income scale we will get more people buying the things businesses offer for sale. More buying means more demand. More demand means more jobs, in theory, for those who will be needed to supply low-wage earners with goods and services.
The next several years will be a lot of fun for economists who study the relationship between income tax rates and economic performance. The "theory" of trickle-down economics has been studied for decades. The data from the U.S. in the 1920s, 1960s, 1980s and 1990s, along with data from China, Eastern Europe, Chile, Sweden, Ireland and other parts of the world is quite clear. When tax rates fall - especially rates paid by the most productive members of the economy - the jobs and wealth created from the top all the way down to the bottom is significant. In effect, poor people become relatively wealthy poor people in places that reward risk takers.
We have not yet seen what happens under the "trickle-up" theory. However, if hammering richer people during a horrible recession while cutting taxes for people who work at McDonald's leads us to the prosperity Mr. Obama claims we will see, I will be the first to argue that Mr. Obama should win the Nobel Prize in Economics.