Fact-Checking President Obama on “Trickle-Down” Economics

Fact-Checking President Obama on “Trickle-Down” Economics

David Weinberger

December 12, 2011 at 3:20 pm

In a recent speech in Kansas, President Obama launched a diatribe against “trickle-down” economic policies. Not only did President Obama mischaracterize conservative tax policy, but facts rebut his claim that these policies have been a failure.

The President began by invoking his understanding of conservative economic philosophy: “If the winners do really well, then jobs and prosperity will eventually trickle down to everybody else.”

“Trickle down” is of course a disingenuous misnomer invented by the left to stigmatize conservative supply-side economic policies. It implies favoring the rich—that doing so will “trickle down” to everyone else. Nonsense. Conservatives don’t care any more or less about the rich than do liberals. The point for conservatives is not to help the rich, but to limit the harm done to incentives by tax policy so individuals have greater opportunities to become rich.

And the proof of the policy’s effectiveness is in the pudding. Every time supply-side economic policies have been tried, tax rate reductions were applied to every income group—lower-income, middle-income, and upper-income alike—giving everyone a better shot at success. This is true regarding supply-side policies of the 1920s, 1960s, 1980s and 2000s, when President George W. Bush took 10 million lower-income individuals off the income tax rolls entirely.

The left relies on data showing that the wealthy received the largest break in dollar terms, but that’s only because they had higher incomes and higher tax burdens to begin with, not because tax cuts were larger for them. A 10 percent tax cut to someone earning $1 million per year is a lot more in dollars than a 20 percent tax cut for someone who’s earning $100,000 per year, when in fact the person earning the lesser amount is actually receiving a steeper percentage cut.

Thus, by focusing on dollar amounts rather than percentage reductions or the distribution of the aggregate tax burden, the left misses the forest for the trees. For example, the marginal tax rate for individual income on top earners was 39.6 percent before the Bush tax cuts. Afterward, the rate was 35 percent—a 13 percent reduction. Meanwhile, the marginal rate for individual income on the lowest earners who qualified to pay income taxes was 15 percent. After the Bush tax cuts, that rate became 10 percent—a 33 percent reduction. And that’s in addition to the fact that Bush removed 10 million low-income earners from the income tax rolls entirely. As a percentage of income level, then, the lowest income groups received the largest benefit.

Furthermore, according the President’s own figures, extending the Bush tax cuts would cost the government $4.4 trillion over the next 10 years. Of that $4.4 trillion, tax cuts for those making over $250,000, or the “rich,” would “cost” $700 billion, or $70 billion per year—less than one-sixth of the total cost. That means that more than 5/6 of the total cost—or benefit—of the tax cuts goes to those earning less than $250,000 per year. So, how can one argue that the Bush tax cuts benefit only the rich?

What’s more, the wealthy now pay more of the total tax burden as a result of the cuts. Here’s economist Brian Riedl:

The share paid by the top quintile edged up from 66.6 percent in 2000 to 67.1 percent in 2004, while the bottom 40 percent’s share dipped from 5.9 percent to 5.4 percent. Clearly, the tax cuts have led to the rich shouldering more of the income tax burden and the poor shouldering less.

Yet the president said, asserting that “trickle-down” economics has never worked:

It doesn’t work. It has never worked. It didn’t work when it was tried in the decade before the Great Depression…and it didn’t work when we tried it during the last decade….Congress passed two of the most expensive tax cuts for the wealthy in history, and where did it get us? The slowest job growth in half a century.

In the 1920s, the top tax rate dropped from 73 percent to 25 percent, and the economy expanded by 59 percent from 1921 to 1929, with annual growth rates of 6 percent. Similarly, in the six quarters following the 2003 tax cuts, GDP growth shot up to 4.1 percent, from 1.7 percent before. From 2003 to 2007, the economy added more than 8 million jobs.

President Obama misrepresented supply-side economics and then went on to misinform his audience that it’s never worked. People are entitled to their own opinions, but they’re not entitled to their own facts.