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Trickle Down or Up?

Copyright © 2004, 2007, 2012, 2016 by David E. Ross

An economic theory popular in the 1980s and again early in the 21st century is "trickle down". This theory holds that cutting taxes for the most affluent portion of our society will create prosperity. The taxes saved by those individuals will be invested in our economy to expand business and create jobs. Also, some of that money will be spent in ways that create more demand for goods and services, further spurring the growth of the economy.

The reality is that the affluent have the same short-term view of life as the rest of us. They tend not to invest the windfall created by tax cuts. And they do not buy more goods and services. Instead, they buy goods and services that are more luxurious — the same amount of cars, clothing, TV sets, and food as we all buy but more expensive items of each, which consumes the dollars that might otherwise be invested. None of this causes our national economy to grow.

My father owned his own business, an independent furniture store. He believed in a "trickle up" economic theory. He supported the concept of government welfare grants because he knew the money would help keep poor people from dropping out of the consumer class. If a person living on welfare did not come into my father's store to buy a toaster or lamp, that person might go into the haberdashery across the street and buy shoes or some shirts, thereby providing an income to the salesman in that store, who might then walk across the street and buy a TV set from my father.

In a consumer-driven economy such as ours, keeping the tax burden light on those least able to pay taxes must have a higher priority than lightening the burden on those who can easily afford to pay. And this principle must be implemented not in terms of absolute dollars but in relative terms.

Of course, anyone who pays taxes thinks he or she is paying too much. But are taxes in the United States really too high? Do lower taxes create a more robust economy?

Here is a chart of the overall tax burden in the 34 nations in the Organization for Economic Cooperation and Development (OECD), showing the burden relative to each nation's economy.

Total tax revenue as % of GDP, 2013

bar graph of taxes as a percentage of GDP for 34 nations

This chart is based on 2013 data since 2015 data are not available for all 34 nations and 2014 data are still being analyzed. These data reflect all national, state or provincial, and local taxes combined, including personal income taxes, corporate taxes, sales and value-added taxes, property taxes, excise taxes, and special taxes for social welfare (e.g., in the U.S., Social Security and Medicare).

Note that the total tax burden in the U.S. is 25.4% of our gross domestic product. Germany, often seen as a model of a strong economy, has an overall tax burden 36.5%, almost 50% higher than the U.S. The only OECD nations with smaller tax burdens than the U.S. are Korea, Chile, and Mexico.

No. Compared with other industrialized nations, the U.S. does not have a high tax burden.

No. Lower taxes do not necessarily create a better economy. Mexico is the least taxed OECD nation, but Mexican nationals keep trying to enter the U.S. for the benefits of our more robust economy.

31 March 2004
Updated 9 April 2016

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