Saturday, October 31, 2015

A mythical creature returns for Halloween

Today is Halloween, and a mythical creature was resurrected in a humorous tweet which was repeated by a certain Cumbrian journalist.

The mythical creature I am writing about is the person who believes in the "trickle down economics" straw man.

This is the idea that if you give more money to the rich some of it will "trickle down" to the poor.

I have never met anyone who believes this, but I have come across many people who are under the false impression that other people believe it. In the words of the distinguished US economist Thomas Sowell, in his book "Basic Economics"

"Whether in the United States or in India, and whether in the past or in the present, ‘trickle down’ has been a characterisation and rejection of what somebody else supposedly believed. Moreover, it has been considered unnecessary to cite any given person who had actually advocated any such thing."

"The phrase ‘trickle down’ often comes up in discussions of tax policies.Tax revenues have in a number of instances gone up when tax rates have been reduced. But any proposal by economists or others to cut tax rates, including reducing the tax rates on higher incomes or on capital gains, can lead to accusations that those making such proposals must believe that benefits should be given to the wealthy in general or to business in particular, in order that these benefits will eventually ‘trickle down’ to the masses of ordinary people."

"But no recognised economist of any school of thought has ever had any such theory or made any such proposal. It is a straw man. It cannot be found in even the most voluminous and learned histories of economic theories."

"What is sought by those who advocate lower rates of taxation or other reductions of government’s role in the economy is not the transfer of existing wealth to higher income earners or businesses but the creation of additional wealth when businesses are less hampered by government controls or by increasing government appropriation of that additional wealth under steeply progressive taxation laws."

 "Whatever the merits or demerits of this view, this is the argument that is made – and which is not confronted, but evaded, by talk of a non-existent ‘trickle down’ theory."

Where confiscatory rates of taxation have been reduced - as when Margaret Thatcher and Geoffrey Howe reduced the higher marginal tax rate in the UK from over 80% (and up to 98 pence in the pound on so-called "unearned income") down to 40% - the total amount of tax paid by the rich, and the proportion of tax paid by the rich, actually went UP.

The rich may have been paying lower tax rates but they paid more money in total and a higher proportion of tax revenue.

The same thing has happened under David Cameron (in this case the fact that the rich are paying a higher proportion of tax is also partly because the coalition government took many people on low incomes out of the tax net and the present government has continued that policy.)

This is the exact opposite of "trickle down theory" because it is not a policy designed to get the rich to pay a smaller total tax bill. It is a policy which has succeeded in getting rich people to pay more tax in total and a higher proportion of tax in total.

Here is link to a Spectator article with more quotes on the subject from Sowell's "Basic Economics"

And here is a video clip of him explaining his views on the subject.

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