Biden attempts to consign trickle-down economics to the dustbin of history

Analysis: Why the president wants to build the US economy from the middle and bottom, not top down

Last modified on Thu 29 Apr 2021 12.22 EDT

Cut taxes on the rich. Unleash a wave of entrepreneurship. Growth will pick up and more jobs will be created. Everybody benefits. That, in essence, is trickle down – a theory of economics that Joe Biden wants to consign to the dustbin of history.

The US president was a young politician when the idea that cutting taxes on the well off would be good for the poor first came into vogue in the 1970s. Now he has used his first address to a joint session of Congress to call on the US’s top 1% to pay for his $1.8tn American families plan – higher spending in areas such as education, childcare and infrastructure.

Anticipating pushback from Republicans on Capitol Hill, Biden had a simple message. It was time, he said, to build the country from the middle and the bottom outwards not from the top down. “Trickle down has never worked,” he said.

The post-war story of the US economy can be divided into two distinct periods: a period from the late 40s to the middle of the 70s when, as President John F Kennedy said, a rising tide lifted all boats; and the trickle-down period ever since.

In the earlier period, the dividend from a growing economy was shared evenly among income groups. Those in the top 10% of earners grew richer at the same rate as those in the bottom 10% of earners. Since the mid-70s average incomes have flatlined once inflation has been taken into account, while most of the gains from growth have gone to those at the top.

A recent paper by the economists Carter Price and Kathryn Edwards fleshed out what that has meant in reality. They calculated that the incomes of the poorest 10% of Americans would be $2.7tn higher had income growth remained as equitable as in the years up until 1975. Cumulatively, the gains to those often struggling to get by on poverty wages would have amounted to $47tn between 1975 and 2018.

Supporters of trickle-down economics say the low levels of pre-crisis unemployment, the US’s record of growing faster than Europe, and the ability of the US to spawn giant world-beating companies all suggest that cutting taxes on the better off does pay off.

Yet, Biden and his supporters would argue that the real comparison is between the US before and after the mid-70s. In the 50s and 60s not only was the world’s biggest economy a less unequal country, it also grew faster. Investment was higher, and so were rates of growth of productivity. This was achieved with an income tax rate on the rich that peaked at 91% – under a Republican president, Dwight Eisenhower.

Biden needs an explanation for why he is reversing the strategy of his predecessor, Donald Trump, by putting up federal income tax to just under 40% for Americans earning more than $400,000 a year. He believes he has one: the end of trickle down will be good for ordinary Americans – and good for the economy, as well.

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