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"Trickle Down" Theory and "Tax Cuts for the Rich"
This essay unscrambles gross misconceptions that have made rational debates about tax policies virtually impossible for decades.
20 pages, Paperback
First published January 1, 2012
300 people are currently reading
1798 people want to read
About the author
Thomas Sowell
88 books5,548 followersThomas Sowell is an American economist, social philosopher, and political commentator. He is a senior fellow at the Hoover Institution. With widely published commentary and books—and as a guest on TV and radio—he became a well-known voice in the American conservative movement as a prominent black conservative. He was a recipient of the National Humanities Medal from President George W. Bush in 2002.
Sowell was born in Gastonia, North Carolina and grew up in Harlem, New York City. Due to poverty and difficulties at home, he dropped out of Stuyvesant High School and worked various odd jobs, eventually serving in the United States Marine Corps during the Korean War. Afterward, he took night classes at Howard University and then attended Harvard University, where he graduated magna cum laude in 1958. He earned a master's degree in economics from Columbia University the next year and a doctorate in economics from the University of Chicago in 1968. In his academic career, he held professorships at Cornell University, Brandeis University, and the University of California, Los Angeles. He has also worked at think tanks including the Urban Institute. Since 1977, he has worked at the Hoover Institution at Stanford University, where he is the Rose and Milton Friedman Senior Fellow on Public Policy.
Sowell was an important figure to the conservative movement during the Reagan era, influencing fellow economist Walter E. Williams and U.S. Supreme Court Justice Clarence Thomas. He was offered a position as Federal Trade Commissioner in the Ford administration, and was considered for posts including U.S. Secretary of Education in the Reagan administration, but declined both times.
Sowell is the author of more than 45 books (including revised and new editions) on a variety of subjects including politics, economics, education and race, and he has been a syndicated columnist in more than 150 newspapers. His views are described as conservative, especially on social issues; libertarian, especially on economics; or libertarian-conservative. He has said he may be best labeled as a libertarian, though he disagrees with the "libertarian movement" on some issues, such as national defense.
Sowell was born in Gastonia, North Carolina and grew up in Harlem, New York City. Due to poverty and difficulties at home, he dropped out of Stuyvesant High School and worked various odd jobs, eventually serving in the United States Marine Corps during the Korean War. Afterward, he took night classes at Howard University and then attended Harvard University, where he graduated magna cum laude in 1958. He earned a master's degree in economics from Columbia University the next year and a doctorate in economics from the University of Chicago in 1968. In his academic career, he held professorships at Cornell University, Brandeis University, and the University of California, Los Angeles. He has also worked at think tanks including the Urban Institute. Since 1977, he has worked at the Hoover Institution at Stanford University, where he is the Rose and Milton Friedman Senior Fellow on Public Policy.
Sowell was an important figure to the conservative movement during the Reagan era, influencing fellow economist Walter E. Williams and U.S. Supreme Court Justice Clarence Thomas. He was offered a position as Federal Trade Commissioner in the Ford administration, and was considered for posts including U.S. Secretary of Education in the Reagan administration, but declined both times.
Sowell is the author of more than 45 books (including revised and new editions) on a variety of subjects including politics, economics, education and race, and he has been a syndicated columnist in more than 150 newspapers. His views are described as conservative, especially on social issues; libertarian, especially on economics; or libertarian-conservative. He has said he may be best labeled as a libertarian, though he disagrees with the "libertarian movement" on some issues, such as national defense.
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Displaying 1 - 30 of 124 reviews
April 19, 2019
I'm really wondering why Sowell decided to write this essay.
In all interviews and other appearances he keeps talking about "the left is so unfactual" and "I can't believe the left is so blind of facts", "they seem to hate facts so much", but quite surprisingly I have not really seen much in the way of factual economic analysis in his work. The few statistics that are used here are clearly cherry picke,such as using 1921 and 1929 as measurement points for assessing the efficacy of a lower income tax. He could have also taken 1923 and 1924, or 1921 and 1931, which would have yielded vastly different results. When you look at the economic data it's pretty clear to me he picks out the few things that sound good.
I have the same problem with Sowell as with Milton Friedman. Both are excellent debaters and storytellers, but their overly simplistic analyses seem to be quite ridiculous in the face of the complex and profoundly unrational economic behavior of humans.
In all interviews and other appearances he keeps talking about "the left is so unfactual" and "I can't believe the left is so blind of facts", "they seem to hate facts so much", but quite surprisingly I have not really seen much in the way of factual economic analysis in his work. The few statistics that are used here are clearly cherry picke,such as using 1921 and 1929 as measurement points for assessing the efficacy of a lower income tax. He could have also taken 1923 and 1924, or 1921 and 1931, which would have yielded vastly different results. When you look at the economic data it's pretty clear to me he picks out the few things that sound good.
I have the same problem with Sowell as with Milton Friedman. Both are excellent debaters and storytellers, but their overly simplistic analyses seem to be quite ridiculous in the face of the complex and profoundly unrational economic behavior of humans.
December 17, 2017
When this "book" came in the mail, I was disappointed that it was 13 pages of text. A couple of hours later I saw that those 13 pages made up one of the most important defences of tax cuts I have ever read.
I had often heard critics of President Reagan call his policy "trickle down" economics. Sowell explains that this is setting up a straw man. By calling it trickle down, they avoid addressing the issue. The desire of those who call for "tax cuts for the rich" are attacked for a desire to see higher income taxpayers retain more of their wealth, which will, presumably, trickle down to others. That is not, however, the intention or even the result of those who call for tax cuts. On the contrary, lower tax rates for the rich was seen as a means to increase their taxes, and reduce the share of the burden of taxation for the lower income taxpayers. Cutting rates in taxation was seen as a means to effect behavioral changes of the wealthy that can change the total output of the economy.
The famed "robber baron" and Treasury Secretary Andrew Mellon called for congress to end "the grotesque" and "evil" tax exemptions for municipal bonds. He pointed out that while the value of these breaks was "relatively worthless" to low income taxpayers, they were used by the wealthy to move their money out of reach of the taxman. The result is to have "higher taxes on all the rest in order to make up the resulting deficiency in the revenues." When Congress refused for political reasons, Secretary Mellon worked to lower tax rates for all.
Of course if a person is paying 70% of $100,000 he is going to receive more than someone making a couple of thousand dollars, even though the rates were cut by a higher rate for the less well off. But the point is, few were paying 70%.
In 1921 the tax rate on people making over $100,000 was 73%, and the federal government took in about $700,000,000, 30% of which was paid by those $100,000 earners. By 1929 after the rate was cut to 24%, the federal government was collecting over $1 billion in income taxes, 65% of the revenue coming from the same people.
This was no accident... under the increasing tax rates imposed during WWI, the number of people reporting $300,000 + income declined from over 1000 in 1916 to less than 300 in 1921... not because people were becoming poorer. Mellon pointed out that investments in tax-exempt securities tripled during the decade.
President Coolidge also emphasized this rationale, saying, "When the taxation of large incomes is approached...the problem is to find a rate which will produce the largest returns. Experience does not show that the higher rate produces the larger revenue.... I agree perfectly with those who wish to relieve the small taxpayer by getting the largest possible contribution from the people with large incomes. But if the rates on large incomes are so high that they disappear, the small taxpayer will be left to bear the entire burden."
This opinion of Coolidge and Mellon was shared by not only John F. Kennedy and Ronald Reagan, but was also stated by John Maynard Keynes, and even earlier by President Woodrow Wilson and two of his treasury secretaries.
President Wilson claimed that high tax rates were "destructive of business activity and productive of waste and inefficiency. There is a point at which in peace times... [high] taxes discourage energy, remove the incentive to new enterprise, encourage extravagant expenditures, and produce industrial stagnation with consequent unemployment and other attendant evils."
Treasury Secretary Carter Glass has said that a high rate of taxation "tends to withdraw the capital of very rich men from the development of new enterprises and place it at the disposal of State and municipal governments upon terms so easy to them... as to stimulate wasteful and nonproductive expenditure by State and municipal governments."
Opponents then and now, mischaracterized the motives of those who called for tax cuts and results of such cuts. Senators Robert La Follette and Burton K. Wheeler claimed the Mellon tax plan was "a master effort of the special privilege mind...[to] tax the poor and relieve the rich."
Arthur Schlesinger, Jr, claimed that Mellon inconsistently called for a balanced budget and paying off the national debt while at the same time seeking tax rate reduction. In reality the debt was reduced from $24 billion in 1921 to under $18 billion in 1928. A widely used textbook claims that "Mellon's spare-the-rich policies...shifted much of the tax burden from the wealthy to the middle-income groups." And yet another textbook claimed that Mellon believed that the burden of taxes should be placed on lower-income earners. It continues, a "share of the tax-free profits of the rich, Mellon reassured the country, would ultimately trickle down to the middle- and lower- income groups in the form of salaries and wages."
What Mellon actually said wash that tax policy "must lessen, so far as possible, the burden of taxation on those least able to bear it." In addition to fighting for the elimination of tax-friendly instruments used by the wealthy, and lowering the tax rates, to ultimately increase the proportion of federal revenue paid by the wealthy, he also called for eliminating federal taxes on movie tickets, because these taxes were paid by "the great bulk of the people whose main source of recreation is attending the movies in the neighborhood of their homes." Mellon, Reagan, Bush Sr., Coolidge basically were motivated to do the exact opposite of what they are often charged with.
I had often heard critics of President Reagan call his policy "trickle down" economics. Sowell explains that this is setting up a straw man. By calling it trickle down, they avoid addressing the issue. The desire of those who call for "tax cuts for the rich" are attacked for a desire to see higher income taxpayers retain more of their wealth, which will, presumably, trickle down to others. That is not, however, the intention or even the result of those who call for tax cuts. On the contrary, lower tax rates for the rich was seen as a means to increase their taxes, and reduce the share of the burden of taxation for the lower income taxpayers. Cutting rates in taxation was seen as a means to effect behavioral changes of the wealthy that can change the total output of the economy.
The famed "robber baron" and Treasury Secretary Andrew Mellon called for congress to end "the grotesque" and "evil" tax exemptions for municipal bonds. He pointed out that while the value of these breaks was "relatively worthless" to low income taxpayers, they were used by the wealthy to move their money out of reach of the taxman. The result is to have "higher taxes on all the rest in order to make up the resulting deficiency in the revenues." When Congress refused for political reasons, Secretary Mellon worked to lower tax rates for all.
Of course if a person is paying 70% of $100,000 he is going to receive more than someone making a couple of thousand dollars, even though the rates were cut by a higher rate for the less well off. But the point is, few were paying 70%.
In 1921 the tax rate on people making over $100,000 was 73%, and the federal government took in about $700,000,000, 30% of which was paid by those $100,000 earners. By 1929 after the rate was cut to 24%, the federal government was collecting over $1 billion in income taxes, 65% of the revenue coming from the same people.
This was no accident... under the increasing tax rates imposed during WWI, the number of people reporting $300,000 + income declined from over 1000 in 1916 to less than 300 in 1921... not because people were becoming poorer. Mellon pointed out that investments in tax-exempt securities tripled during the decade.
President Coolidge also emphasized this rationale, saying, "When the taxation of large incomes is approached...the problem is to find a rate which will produce the largest returns. Experience does not show that the higher rate produces the larger revenue.... I agree perfectly with those who wish to relieve the small taxpayer by getting the largest possible contribution from the people with large incomes. But if the rates on large incomes are so high that they disappear, the small taxpayer will be left to bear the entire burden."
This opinion of Coolidge and Mellon was shared by not only John F. Kennedy and Ronald Reagan, but was also stated by John Maynard Keynes, and even earlier by President Woodrow Wilson and two of his treasury secretaries.
President Wilson claimed that high tax rates were "destructive of business activity and productive of waste and inefficiency. There is a point at which in peace times... [high] taxes discourage energy, remove the incentive to new enterprise, encourage extravagant expenditures, and produce industrial stagnation with consequent unemployment and other attendant evils."
Treasury Secretary Carter Glass has said that a high rate of taxation "tends to withdraw the capital of very rich men from the development of new enterprises and place it at the disposal of State and municipal governments upon terms so easy to them... as to stimulate wasteful and nonproductive expenditure by State and municipal governments."
Opponents then and now, mischaracterized the motives of those who called for tax cuts and results of such cuts. Senators Robert La Follette and Burton K. Wheeler claimed the Mellon tax plan was "a master effort of the special privilege mind...[to] tax the poor and relieve the rich."
Arthur Schlesinger, Jr, claimed that Mellon inconsistently called for a balanced budget and paying off the national debt while at the same time seeking tax rate reduction. In reality the debt was reduced from $24 billion in 1921 to under $18 billion in 1928. A widely used textbook claims that "Mellon's spare-the-rich policies...shifted much of the tax burden from the wealthy to the middle-income groups." And yet another textbook claimed that Mellon believed that the burden of taxes should be placed on lower-income earners. It continues, a "share of the tax-free profits of the rich, Mellon reassured the country, would ultimately trickle down to the middle- and lower- income groups in the form of salaries and wages."
What Mellon actually said wash that tax policy "must lessen, so far as possible, the burden of taxation on those least able to bear it." In addition to fighting for the elimination of tax-friendly instruments used by the wealthy, and lowering the tax rates, to ultimately increase the proportion of federal revenue paid by the wealthy, he also called for eliminating federal taxes on movie tickets, because these taxes were paid by "the great bulk of the people whose main source of recreation is attending the movies in the neighborhood of their homes." Mellon, Reagan, Bush Sr., Coolidge basically were motivated to do the exact opposite of what they are often charged with.
December 2, 2017
This is a very clear-headed essay on "trickle-down" economics and tax cuts for the rich. Here, Sowell points out that there is a rampant misconception amongst the Left regarding why many fiscal conservatives favour tax cuts for the rich. The argument is emphatically not to give the rich (or, euphemistically put, "the job creators and entrepreneurs") more prosperity so that the prosperity will somehow "trickle down" to the less well-off. Sowell sums up the disconnect between the two sides thusly (p. 6):
As Sowell argues, the reason why increasing tax rates for those in a higher income bracket is bad that it incentivises them to park their money in tax-exempt shelters - if this was a problem present during the 1920s (when Secretary of Treasury Andrew Mellon first advocated cuts in taxes for the rich), it is even more an issue now since a globalised economy makes "overseas investment a readily available alternative to buying tax-exempt bonds domestically." By lowering tax rates, we get two primary outcomes: (1) government revenue increases, since overly high tax rates paradoxically reduces the tax revenue received by the government due to people parking their money in tax-exempt institutions, which consequently shifts the tax burden disproportionately onto the less well-off (cf. Laffer Curve), (2) economic growth gets a boost, since now those in upper income brackets are more likely to invest their money in "valuable undertakings" as opposed to diverting their money in "less productive activit[ies] [...] [which] inhibit our growth and efficiency", allowing for a "more prosperous, expanding economy." (Note: these were the words of JF Kennedy).
Sowell's point is very well-taken, and I like that this essay was short and concise, because there's no need (unlike what another reviewer suggested) to create a 600 page tome in order to make this simple (albeit sophisticated) point, and highlight how the Right and the Left are talking past each other (in particular, how rampant misconceptions are on the Left regarding the justification for tax cuts for the rich). Also, somewhat tangential point, Sowell makes me appreciate the value of economic knowledge in a way that I haven't done before - when designing policies and trying to convince the public that these are the "correct" policies for the nation, it is easy to design policies that appeal to emotions and have strong populist appeal. Economics (or good economics) asks: Okay, but what are the facts? And what are the assumptions are we working with?
This book is certainly an incredibly helpful instrument when using to parse the arguments made by the Left against tax cuts for the rich. For instance, Rachel Maddow "debunked" trickle-down economics in this video:
http://www.dailymotion.com/video/x2xsxkq
Fundamentally, Sowell's book makes it clear to us that Maddow is relying on a strawman and she doesn't seem to realise (or perhaps she does, because why else just have a 1-second snippet of a politician saying the words "trickle-down") that she's falsely attributing trickle down economics as the primary justification for cutting taxes on the rich.
However, putting that aside, she's still employing some statistics to make her point and they are well worth considering. For one, she gives us the modest increase in median family income in the middle-income bracket as compared to the high-income bracket, which suggests that the economic "trickle-down" hasn't really happened under Reaganomics. A couple of points. First, I've read elsewhere that Sowell doesn't think median family income is the best gauge for economic progress since median family size has fallen, so perhaps average individual income is a better gauge. Second, this statistics neglects to acknowledge the fact that (according to the Cato Institute):
But she raises another statistic that I'm troubled by, namely the fact that government debt increased dramatically under Reagan's rule. I'm not sure if that's due to Reaganomics per se or whether it's due to the "Star Wars" programme that Reagen launched as a foreign policy initiative against the Soviet Union. But I've a feeling this probably isn't a complete explanation, and I'd like to have more information from Sowell on this, especially since Reaganomics has been turned into this punching bag by the Left. In any case, I've docked a star from Sowell's book because I felt that there was a little too much emphasis on Andrew Mellon (which I concede is absolutely important, because this is how the whole messy debate started) and not enough analysis on Reaganomics. The most he says is that Reagan wished to cut taxes for the rich in anticipation of the changes in behaviour by the rich, i.e. Reagan did not subscribe to the "trickle down" theory nor did he use it to justify tax cuts for the rich. More information of Reaganomics, on how it was conceived, on how well it performed according to certain agreed-upon economic metrics and how the Left attacked its achievements would be very much welcome. Also, Sowell doesn't touch on the troubling implications for income inequality that cutting taxes for the rich might have - certainly this is a favourite statistics used to discredit Reaganomics, so this merited some discussion I believe.
There's a lot of populist rhetoric flying around in the current Presidential race - on the Left, it's a question of who has the backs of the bottom 99% and the minorities, on the Right, it's appealing to anti-foreigner sentiments and other residual socially conservative values that have felt unrepresented since the turn of the millennium. While I'm not saying I completely agree with Sowell on everything going forward (I'm definitely planning to read more of his stuff), he's a very sensible man and he gives you valuable analytical tools to begin re-examining Leftist assumptions (just be sure you take the time to examine Republican/Right-wing assumptions as well, beyond just painting everything with the broad brush of bigotry).
If only I could find this man's email, so I could begin corresponding with him!
Repeatedly, over the years, the arguments of the proponents and opponents of tax rate reductions have been arguments about two fundamentally different things. Proponents of tax rate cuts base their arguments on anticipated changes in behaviour by investors in response to reduced income tax rates. Opponents of tax cuts attribute to the proponents a desire to see higher income taxpayers have more after-tax income, so that their prosperity will somehow 'trickle down' to others, which opponents of tax cuts deny will happen.
As Sowell argues, the reason why increasing tax rates for those in a higher income bracket is bad that it incentivises them to park their money in tax-exempt shelters - if this was a problem present during the 1920s (when Secretary of Treasury Andrew Mellon first advocated cuts in taxes for the rich), it is even more an issue now since a globalised economy makes "overseas investment a readily available alternative to buying tax-exempt bonds domestically." By lowering tax rates, we get two primary outcomes: (1) government revenue increases, since overly high tax rates paradoxically reduces the tax revenue received by the government due to people parking their money in tax-exempt institutions, which consequently shifts the tax burden disproportionately onto the less well-off (cf. Laffer Curve), (2) economic growth gets a boost, since now those in upper income brackets are more likely to invest their money in "valuable undertakings" as opposed to diverting their money in "less productive activit[ies] [...] [which] inhibit our growth and efficiency", allowing for a "more prosperous, expanding economy." (Note: these were the words of JF Kennedy).
Sowell's point is very well-taken, and I like that this essay was short and concise, because there's no need (unlike what another reviewer suggested) to create a 600 page tome in order to make this simple (albeit sophisticated) point, and highlight how the Right and the Left are talking past each other (in particular, how rampant misconceptions are on the Left regarding the justification for tax cuts for the rich). Also, somewhat tangential point, Sowell makes me appreciate the value of economic knowledge in a way that I haven't done before - when designing policies and trying to convince the public that these are the "correct" policies for the nation, it is easy to design policies that appeal to emotions and have strong populist appeal. Economics (or good economics) asks: Okay, but what are the facts? And what are the assumptions are we working with?
This book is certainly an incredibly helpful instrument when using to parse the arguments made by the Left against tax cuts for the rich. For instance, Rachel Maddow "debunked" trickle-down economics in this video:
http://www.dailymotion.com/video/x2xsxkq
Fundamentally, Sowell's book makes it clear to us that Maddow is relying on a strawman and she doesn't seem to realise (or perhaps she does, because why else just have a 1-second snippet of a politician saying the words "trickle-down") that she's falsely attributing trickle down economics as the primary justification for cutting taxes on the rich.
However, putting that aside, she's still employing some statistics to make her point and they are well worth considering. For one, she gives us the modest increase in median family income in the middle-income bracket as compared to the high-income bracket, which suggests that the economic "trickle-down" hasn't really happened under Reaganomics. A couple of points. First, I've read elsewhere that Sowell doesn't think median family income is the best gauge for economic progress since median family size has fallen, so perhaps average individual income is a better gauge. Second, this statistics neglects to acknowledge the fact that (according to the Cato Institute):
"on 8 of the 10 key economic variables examined, the American economy performed better during the Reagan years than during the pre- and post-Reagan years. Real median family income grew by $4,000 during the Reagan period after experiencing no growth in the pre-Reagan years; it experienced a loss of almost $1,500 in the post-Reagan years."
But she raises another statistic that I'm troubled by, namely the fact that government debt increased dramatically under Reagan's rule. I'm not sure if that's due to Reaganomics per se or whether it's due to the "Star Wars" programme that Reagen launched as a foreign policy initiative against the Soviet Union. But I've a feeling this probably isn't a complete explanation, and I'd like to have more information from Sowell on this, especially since Reaganomics has been turned into this punching bag by the Left. In any case, I've docked a star from Sowell's book because I felt that there was a little too much emphasis on Andrew Mellon (which I concede is absolutely important, because this is how the whole messy debate started) and not enough analysis on Reaganomics. The most he says is that Reagan wished to cut taxes for the rich in anticipation of the changes in behaviour by the rich, i.e. Reagan did not subscribe to the "trickle down" theory nor did he use it to justify tax cuts for the rich. More information of Reaganomics, on how it was conceived, on how well it performed according to certain agreed-upon economic metrics and how the Left attacked its achievements would be very much welcome. Also, Sowell doesn't touch on the troubling implications for income inequality that cutting taxes for the rich might have - certainly this is a favourite statistics used to discredit Reaganomics, so this merited some discussion I believe.
There's a lot of populist rhetoric flying around in the current Presidential race - on the Left, it's a question of who has the backs of the bottom 99% and the minorities, on the Right, it's appealing to anti-foreigner sentiments and other residual socially conservative values that have felt unrepresented since the turn of the millennium. While I'm not saying I completely agree with Sowell on everything going forward (I'm definitely planning to read more of his stuff), he's a very sensible man and he gives you valuable analytical tools to begin re-examining Leftist assumptions (just be sure you take the time to examine Republican/Right-wing assumptions as well, beyond just painting everything with the broad brush of bigotry).
If only I could find this man's email, so I could begin corresponding with him!
June 2, 2018
A quick essay demonstrating that the "trickle down theory" is a myth and has never once been argued for by "any economist, politician or person in any other walk of life." But rather "a classic example of arguing against a caricature instead of confronting the argument actually made."
Sowell demonstrates that when tax rates are raised less people pay them via tax-exempt loopholes. When they are lowered, higher tax brackets pay a larger percentage and tax revenues raise.
Here's an interview with Sowell on the essay as well as interacting with those purporting the lie in the 2012 election: https://www.youtube.com/watch?v=YPEQM...
Sowell demonstrates that when tax rates are raised less people pay them via tax-exempt loopholes. When they are lowered, higher tax brackets pay a larger percentage and tax revenues raise.
Here's an interview with Sowell on the essay as well as interacting with those purporting the lie in the 2012 election: https://www.youtube.com/watch?v=YPEQM...
March 5, 2018
Tax cuts for the rich has not once worked in the history of the US. There is more data to back that up. He claims, as others do, the rich will “more than likely” re-invest in the economy. This is a MAJOR assumption they will do the right thing. Providing them tax cuts because you are fearful of the rich is not a solution. If an employee proposed a solution that “more than likely” may work with very little usable data to back that up, I would “more than likely” remove their responsibility and give them an easier task.
Would anyone have faith in the rich to suddenly stop being greedy? Some may do the right thing and reinvest, but not enough to turn the economy. Capitalism allows greed. Greed is primal. It would take a motivation to get the majority of wealthy to invest, a common motivation like an attack on the US or war.
He claims tax cuts worked in the 20s, with little data to back it up. It’s not the 20s; it’s different times, different economy. Feels a little bit like he’s trying to prove his point using his reputation. He quotes president speeches......
I like Thomas Sowells writing normally, but I disagree on this analysis here with very little data to back up his argument. And it’s short.
How about a solution to “guarantee” reinvestment occurs. Provide incentives. To “nudge” them in the right direction. Behavioral economics to the rescue! Haha.
Would anyone have faith in the rich to suddenly stop being greedy? Some may do the right thing and reinvest, but not enough to turn the economy. Capitalism allows greed. Greed is primal. It would take a motivation to get the majority of wealthy to invest, a common motivation like an attack on the US or war.
He claims tax cuts worked in the 20s, with little data to back it up. It’s not the 20s; it’s different times, different economy. Feels a little bit like he’s trying to prove his point using his reputation. He quotes president speeches......
I like Thomas Sowells writing normally, but I disagree on this analysis here with very little data to back up his argument. And it’s short.
How about a solution to “guarantee” reinvestment occurs. Provide incentives. To “nudge” them in the right direction. Behavioral economics to the rescue! Haha.
October 19, 2012
Well reasoned and well annotated read. Should be read by anyone that has heard the term "trickle down economics". The book is a short read and can easily be finished in an hour or less. Thomas Sowell always writes with a clear and concise style.
October 3, 2024
An excellent review breaking down misconceptions about this popular economic theory. Historical examples and plain language made this an easy read, and I read it in less than an hour.
January 29, 2018
A thoroughly relevant and common sense book that easily dismantles widespread 'hysteria' about proposed tax cuts 'benefitting the rich' and not the poor. Its an old age lie that thrives on profound ignorance and sensation of the masses. Or maybe its just intellectual laziness from many people who expect the media and partisan 'experts' to think for them which also regrettably ( is often) coupled with an "underlying" idea that governments should everything for the people. (i.e bigger government)
I love Sowell's no-nonsense, factual and sourced approach to this discussion. It behooves sensible people or those striving for a clarity to avoid the hype and get to the crux of this discussion. This basic economic theory book is highly recommended for individuals who believe and know that they are responsible for their actions.
I love Sowell's no-nonsense, factual and sourced approach to this discussion. It behooves sensible people or those striving for a clarity to avoid the hype and get to the crux of this discussion. This basic economic theory book is highly recommended for individuals who believe and know that they are responsible for their actions.
February 28, 2021
"Repeatedly, over the years, the arguments of the proponents and opponents of tax rate reductions have been arguments about two fundamentally different things....One side is talking about behavioral changes that can change the total output of the economy, while the other side is talking about changing the direction of existing after-tax income flows among people of differing income levels at existing levels of output. These have been arguments about very different things, and the two arguments have largely gone past each other untouched" - Thomas Sowell
December 26, 2020
Wow. Tout simplement. Belle argumentation.
Sowell démontre dans ce livre ce qui peut se produire quand on baisse les taxes des riches avec des exemples datant de 1920.
On voit dans son argumentation le côté contre-intuitif du fait que de baisser les taux de taxes des riches peut en réalité baisser le fardeau fiscal des pauvres. On voit aussi que même les historiens ne font pas la différence entre une baisse de taux et une baisse de fardeau fiscal. Dans les années 20, les taux des riches ont baissé, mais la proportion des impôts payés par ceux-ci ont augmenté.
En passant, je dis livre, mais c'est 13 pages extrêmement bien construites.
Sowell démontre dans ce livre ce qui peut se produire quand on baisse les taxes des riches avec des exemples datant de 1920.
On voit dans son argumentation le côté contre-intuitif du fait que de baisser les taux de taxes des riches peut en réalité baisser le fardeau fiscal des pauvres. On voit aussi que même les historiens ne font pas la différence entre une baisse de taux et une baisse de fardeau fiscal. Dans les années 20, les taux des riches ont baissé, mais la proportion des impôts payés par ceux-ci ont augmenté.
En passant, je dis livre, mais c'est 13 pages extrêmement bien construites.
June 9, 2025
Short and to the point. Valuable read if you want to understand the debate about "tax cuts for the rich" or "trickle down economics".
December 3, 2022
Not exactly a book, and after I read it I felt there was much more one can say and explore within these two topics that Sowell is clarifying on here. Other than that, a refreshing read as usual by Thomas Sowell.
March 19, 2019
Tom Sowell exposes the strawman the left loves to attack. As usual his writing is lucid and accessible - even to laymen in economics.
On "trickle-down" theory:
"No such theory has been found in even the most voluminous and learned histories of economic theories...Yet this non-existent theory has become the object of denunciations...It is a classic example of arguing against a caricature instead of confronting the argument actually made."
"While arguments for cuts in high tax rates have often been made by free-market economists or by conservatives in the American sense, such arguments have also sometimes been made by people who were neither, including John Maynard Keynes and Democratic Presidents Woodrow Wilson and John F. Kennedy."
As to where the actual term "trickle-down" actually comes from, it seems to have come from FDR's speech writer Samuel Rosenman - and it's been used ever since. He was arguing against a series of tax rate reductions advocated for by Secretary of the Treasury Andrew Mellon. But the arguments Mellon was advocating had nothing to do with "trickle-down theory."
"Mellon pointed out that, under the high income tax rates at the end of the Woodrow Wilson administration in 1921, vast sums of money had been put into tax shelters such as tax exempt municipal bonds, instead of being invested in the private economy, where this money would create more output, income and jobs."
"What actually followed the cuts in tax rates in the 1920s were rising output, rising employment to produce that output, rising incomes as a result and rising tax revenues for the government because of the rising incomes, even thought the tax rates had been lowered...The facts are unmistakably plain, for those who bother to check the facts."
In 1921, the tax rate for people with incomes over $100,000/year was 73%.
The Fed collected a little over $700 million in income taxes.
30% of those taxes were paid by the people making over $100,000/year.
By 1929, the tax rate for people with incomes over $100,000/year was 24%.
The Fed collected more than a billion dollars in income taxes.
65% of those taxes were paid by the people making over $100,000/year.
"There is nothing mysterious about this."
Under the Wilson administration tax rates rose sharply, in part, to pay for World War I.
"Under these escalating wartime income tax rates, the number people reporting taxable incomes of more than $300,000 - a huge sum in the money of that era - declined from well over a thousand in 1916 to fewer than three hundred in 1921...Since these were years of generally rising incomes, as Mellon pointed out, there was no reason to believe that the wealthy were suddenly suffering drastic reductions in their own incomes, but considerable reason to believe that they were receiving tax-exempt incomes that did not have to be reported under existing laws at that time...the money invested in tax-exempt securities had nearly tripled in a decade."
So pulling down $300k in 1916 was like making almost $7,000,000 today. Despite overall income growth throughout the economy in those years of the Wilson administration, 70% of your "multi-millionaires" just "disappear?" And at the same time, you see a tripling of investment in tax-exempt securities? Okay. I'll play along. Who makes up for the fact that these vast sums of taxable income disappeared? I'll give you a hint. It's not people wealthy and savvy enough to seek refuge in these exempt securities.
"Secretary Mellon repeatedly sought to get Congress to end tax-exemptions for municipal bonds and other securities, pointing out the inefficiencies in the economy that such securities created."
"In other words, high tax rates that many people avoid paying do not necessarily bring in as much revenue to the government as lower tax rates that more people are in fact paying, when these lower tax rates make it safe to invest their money where they can get a higher rate of return in the economy than they get from tax-exempt securities."
"The point here is not simply that the weight of evidence is on one side of the argument rather than the other but, more fundamentally, that there was no serious engagement with the arguments actually advanced, but instead an evasion of those arguments by depicting them as simply a way of transferring tax burdens from the rich to other taxpayers."
This all sounds pretty familiar.
"One side is talking about behavioral changes that can change the total output of the economy, while the other side is talking about changing the direction of existing after-tax income flows among people of differing income levels at existing levels of output."
Calving Coolidge was pretty explicit about the actual purpose of lowering tax rates:
"The first object of taxation is to secure revenue. When the taxation of large incomes is approached with this in view, the problem is to find a rate which will produce the largest returns. Experience does not show that the higher rate produces the larger revenue...I agree perfectly with those who wish to relieve the small taxpayer by getting the largest possible contribution from the people with large incomes. But if the rates on large incomes are so high that they disappear, the small taxpayer will be left to bear the entire burden."
The one and only John Maynard Keynes said, in 1933:
"...taxation may be so high as to defeat its object...given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the Budget."
John F. Kennedy's address to Congress in January 1963:
"...it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now." This was because investors' "efforts to avoid tax liabilities" make "certain types of less productive activity more profitable than other more valuable undertakings" and "this inhibits our growth and efficiency."
President Kennedy was talking about inducing changes in behavior in order to increase aggregate output. He wasn't talking about changing the allocation of existing income in expectation of it "trickling down." Reagan made the same arguments, probably to a much different reception.
"In short, neither of these earlier nor later arguments for cuts in tax rates had anything to do with making some people more prosperous, so that their prosperity might "trickle down" to others."
Historians and biographers have likewise failed to distinguish this key point. In reality, the national debt WAS reduced during the 1920s, from $24 billion (1921) to under $18 billion (1928). Hard data SHOWS that the amount and the proportion of taxes paid by income earners under $25,000/year went DOWN in those same years. The taxes paid by individuals making between $50,000-100,000/year went up. Those individuals making over $100,000/year went up more sharply.
Mellon was advocating the direct opposite of the policies attributed to him.
"The very idea that profits "trickle down" to workers depicts the economic sequence of events in the opposite order from that in the real world."
"The real effect of tax rate reductions is to make the future prospects of profit look more favorable, leading to more current investments that generate more current economic activity and more jobs. Those who attribute a trickle-down theory to others are attributing their own misconception to others, as well as distorting both the arguments used and the hard facts about what actually happened after the recommended policies were put into effect."
"The results show how unreliable peer consensus can be, even when it is a peer consensus of highly intellectual people (historians), if those people share a very similar vision of the world and treat its conclusions as axioms, rather than as hypotheses that need to be checked against facts."
Implicit in their approaches is a zero-sum conception of the economy. The benefits of some have to come at the expense of others. It's fallacious and narrow and ignorant. Challenging ideas, or the conclusions that derive from them, on analytical or empirical grounds is legitimate. Attributing to them arguments that were never made is not.
Tax revenues rose during the George W. Bush administration, following tax cuts, and the New York Times reported:
"An unexpectedly steep rise in tax revenues from corporations and the wealthy is driving down the projected budget deficit this year."
"Unexpected" to who? To the New York Times, maybe. Not unexpected to proponents of reducing high tax rates.
"To the extent that the American economy has changed since the time of Andrew Mellon, it has changed in ways that make it even easier for wealthy investors to escape high tax rates. A globalized economy makes overseas investments a readily available alternative to buying tax-exempt bonds domestically. Even if the domestic tax rate is not "high" by historic standards, what matters now is whether it is high compared to tax rates in other countries to which large sums of money can be readily sent electronically. Meanwhile, unemployed workers cannot nearly so readily relocate to other countries to take the jobs created there by American investments fleeing higher tax rates at home."
Interesting essay. Compelling points. It's short but well-researched, containing 57 citations.
On "trickle-down" theory:
"No such theory has been found in even the most voluminous and learned histories of economic theories...Yet this non-existent theory has become the object of denunciations...It is a classic example of arguing against a caricature instead of confronting the argument actually made."
"While arguments for cuts in high tax rates have often been made by free-market economists or by conservatives in the American sense, such arguments have also sometimes been made by people who were neither, including John Maynard Keynes and Democratic Presidents Woodrow Wilson and John F. Kennedy."
As to where the actual term "trickle-down" actually comes from, it seems to have come from FDR's speech writer Samuel Rosenman - and it's been used ever since. He was arguing against a series of tax rate reductions advocated for by Secretary of the Treasury Andrew Mellon. But the arguments Mellon was advocating had nothing to do with "trickle-down theory."
"Mellon pointed out that, under the high income tax rates at the end of the Woodrow Wilson administration in 1921, vast sums of money had been put into tax shelters such as tax exempt municipal bonds, instead of being invested in the private economy, where this money would create more output, income and jobs."
"What actually followed the cuts in tax rates in the 1920s were rising output, rising employment to produce that output, rising incomes as a result and rising tax revenues for the government because of the rising incomes, even thought the tax rates had been lowered...The facts are unmistakably plain, for those who bother to check the facts."
In 1921, the tax rate for people with incomes over $100,000/year was 73%.
The Fed collected a little over $700 million in income taxes.
30% of those taxes were paid by the people making over $100,000/year.
By 1929, the tax rate for people with incomes over $100,000/year was 24%.
The Fed collected more than a billion dollars in income taxes.
65% of those taxes were paid by the people making over $100,000/year.
"There is nothing mysterious about this."
Under the Wilson administration tax rates rose sharply, in part, to pay for World War I.
"Under these escalating wartime income tax rates, the number people reporting taxable incomes of more than $300,000 - a huge sum in the money of that era - declined from well over a thousand in 1916 to fewer than three hundred in 1921...Since these were years of generally rising incomes, as Mellon pointed out, there was no reason to believe that the wealthy were suddenly suffering drastic reductions in their own incomes, but considerable reason to believe that they were receiving tax-exempt incomes that did not have to be reported under existing laws at that time...the money invested in tax-exempt securities had nearly tripled in a decade."
So pulling down $300k in 1916 was like making almost $7,000,000 today. Despite overall income growth throughout the economy in those years of the Wilson administration, 70% of your "multi-millionaires" just "disappear?" And at the same time, you see a tripling of investment in tax-exempt securities? Okay. I'll play along. Who makes up for the fact that these vast sums of taxable income disappeared? I'll give you a hint. It's not people wealthy and savvy enough to seek refuge in these exempt securities.
"Secretary Mellon repeatedly sought to get Congress to end tax-exemptions for municipal bonds and other securities, pointing out the inefficiencies in the economy that such securities created."
"In other words, high tax rates that many people avoid paying do not necessarily bring in as much revenue to the government as lower tax rates that more people are in fact paying, when these lower tax rates make it safe to invest their money where they can get a higher rate of return in the economy than they get from tax-exempt securities."
"The point here is not simply that the weight of evidence is on one side of the argument rather than the other but, more fundamentally, that there was no serious engagement with the arguments actually advanced, but instead an evasion of those arguments by depicting them as simply a way of transferring tax burdens from the rich to other taxpayers."
This all sounds pretty familiar.
"One side is talking about behavioral changes that can change the total output of the economy, while the other side is talking about changing the direction of existing after-tax income flows among people of differing income levels at existing levels of output."
Calving Coolidge was pretty explicit about the actual purpose of lowering tax rates:
"The first object of taxation is to secure revenue. When the taxation of large incomes is approached with this in view, the problem is to find a rate which will produce the largest returns. Experience does not show that the higher rate produces the larger revenue...I agree perfectly with those who wish to relieve the small taxpayer by getting the largest possible contribution from the people with large incomes. But if the rates on large incomes are so high that they disappear, the small taxpayer will be left to bear the entire burden."
The one and only John Maynard Keynes said, in 1933:
"...taxation may be so high as to defeat its object...given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the Budget."
John F. Kennedy's address to Congress in January 1963:
"...it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now." This was because investors' "efforts to avoid tax liabilities" make "certain types of less productive activity more profitable than other more valuable undertakings" and "this inhibits our growth and efficiency."
President Kennedy was talking about inducing changes in behavior in order to increase aggregate output. He wasn't talking about changing the allocation of existing income in expectation of it "trickling down." Reagan made the same arguments, probably to a much different reception.
"In short, neither of these earlier nor later arguments for cuts in tax rates had anything to do with making some people more prosperous, so that their prosperity might "trickle down" to others."
Historians and biographers have likewise failed to distinguish this key point. In reality, the national debt WAS reduced during the 1920s, from $24 billion (1921) to under $18 billion (1928). Hard data SHOWS that the amount and the proportion of taxes paid by income earners under $25,000/year went DOWN in those same years. The taxes paid by individuals making between $50,000-100,000/year went up. Those individuals making over $100,000/year went up more sharply.
Mellon was advocating the direct opposite of the policies attributed to him.
"The very idea that profits "trickle down" to workers depicts the economic sequence of events in the opposite order from that in the real world."
"The real effect of tax rate reductions is to make the future prospects of profit look more favorable, leading to more current investments that generate more current economic activity and more jobs. Those who attribute a trickle-down theory to others are attributing their own misconception to others, as well as distorting both the arguments used and the hard facts about what actually happened after the recommended policies were put into effect."
"The results show how unreliable peer consensus can be, even when it is a peer consensus of highly intellectual people (historians), if those people share a very similar vision of the world and treat its conclusions as axioms, rather than as hypotheses that need to be checked against facts."
Implicit in their approaches is a zero-sum conception of the economy. The benefits of some have to come at the expense of others. It's fallacious and narrow and ignorant. Challenging ideas, or the conclusions that derive from them, on analytical or empirical grounds is legitimate. Attributing to them arguments that were never made is not.
Tax revenues rose during the George W. Bush administration, following tax cuts, and the New York Times reported:
"An unexpectedly steep rise in tax revenues from corporations and the wealthy is driving down the projected budget deficit this year."
"Unexpected" to who? To the New York Times, maybe. Not unexpected to proponents of reducing high tax rates.
"To the extent that the American economy has changed since the time of Andrew Mellon, it has changed in ways that make it even easier for wealthy investors to escape high tax rates. A globalized economy makes overseas investments a readily available alternative to buying tax-exempt bonds domestically. Even if the domestic tax rate is not "high" by historic standards, what matters now is whether it is high compared to tax rates in other countries to which large sums of money can be readily sent electronically. Meanwhile, unemployed workers cannot nearly so readily relocate to other countries to take the jobs created there by American investments fleeing higher tax rates at home."
Interesting essay. Compelling points. It's short but well-researched, containing 57 citations.
January 29, 2016
Freely available here: http://www.tsowell.com/images/Hoover%...
It is an argument that is widely discussed and is well known. An argument which has persisted as a malformed thesis that many attack others for having. It is widely heard on a daily basis by the most meaning of commentators and news reporters. Politicians will roundly attack others for advocating it but be without clear explicit examples. it is a pervading apparition of faulty debate that persists in the intellectual discourse of political science.
Sowell begins with an important quotation for the argument that he is developing and seeking to elaborate albeit in a small space, in this pamphlet. The J.A. Schumpeter quote is as follows, "We fight for and against not men and things as they are, but for and against the caricatures we make of them.” It is apt because Sowell is seeking to argue that the theory of the ‘trickle down economy’ despite having its detractors, is not a traceable economic theory, but rather a bastardised caricature of a particular subset of free market economic theory. The meat and potatoes of Sowell’s argument is contained within a footnote,
"Some years ago, in my syndicated column, I challenged anyone to name any economist, of any school of thought, who had actually advocated a “trickle down” theory. No one quoted any economist, politician or person in any other walk of life who had ever advocated such a theory, even though many readers named someone who claimed that someone else had advocated it, without being able to quote anything actually said by that someone else.”
Evidence for such a theory is thus presumably based on the oft handed attributions that are made to other people. It is surprising though that no advocates were found for such a thesis, because the thesis in question, despite being a caricature should theoretically develop both detractors and defenders. The argument is important for looking at how intellectual debates can be haunted by sophistry and misattributed claims. Intellectual debates are hard to have because people are bogged down by these inaccuracies and so genuine ideological difference can be hard to establish.
Sowell traces the use of the argument to one of President Roosevelt’s speech writers, Samuel Rosenman, who objected to the following "philosophy that had prevailed in Washington since 1921, that the object of government was to provide prosperity for those who lived and worked at the top of the economic pyramid, in the belief that prosperity would trickle down to the bottom of the heap and benefit all.” The speechwriter was referring to arguments that were being advanced by the then Secretary of the Treasury Andrew Mellon, who argued that considerable sums of money were being hidden away in tax shelters, instead of being invested in the private economy. The problem was that the rate itself was too high and so loopholes were found and investment was diverted. A confusion, that Sowell points out is that there is a confusion between what constitutes ‘tax rates’ and ‘tax revenues’. The tax rate is not the same as the tax revenue. Sowell (11) notes, "The real effect of tax rate reductions is to make the future prospects of profit look more favorable, leading to more current investments that generate more current economic activity and more jobs.” which will increase tax revenue that is collected, due to greater investment in the economy.
It is an argument that is widely discussed and is well known. An argument which has persisted as a malformed thesis that many attack others for having. It is widely heard on a daily basis by the most meaning of commentators and news reporters. Politicians will roundly attack others for advocating it but be without clear explicit examples. it is a pervading apparition of faulty debate that persists in the intellectual discourse of political science.
Sowell begins with an important quotation for the argument that he is developing and seeking to elaborate albeit in a small space, in this pamphlet. The J.A. Schumpeter quote is as follows, "We fight for and against not men and things as they are, but for and against the caricatures we make of them.” It is apt because Sowell is seeking to argue that the theory of the ‘trickle down economy’ despite having its detractors, is not a traceable economic theory, but rather a bastardised caricature of a particular subset of free market economic theory. The meat and potatoes of Sowell’s argument is contained within a footnote,
"Some years ago, in my syndicated column, I challenged anyone to name any economist, of any school of thought, who had actually advocated a “trickle down” theory. No one quoted any economist, politician or person in any other walk of life who had ever advocated such a theory, even though many readers named someone who claimed that someone else had advocated it, without being able to quote anything actually said by that someone else.”
Evidence for such a theory is thus presumably based on the oft handed attributions that are made to other people. It is surprising though that no advocates were found for such a thesis, because the thesis in question, despite being a caricature should theoretically develop both detractors and defenders. The argument is important for looking at how intellectual debates can be haunted by sophistry and misattributed claims. Intellectual debates are hard to have because people are bogged down by these inaccuracies and so genuine ideological difference can be hard to establish.
Sowell traces the use of the argument to one of President Roosevelt’s speech writers, Samuel Rosenman, who objected to the following "philosophy that had prevailed in Washington since 1921, that the object of government was to provide prosperity for those who lived and worked at the top of the economic pyramid, in the belief that prosperity would trickle down to the bottom of the heap and benefit all.” The speechwriter was referring to arguments that were being advanced by the then Secretary of the Treasury Andrew Mellon, who argued that considerable sums of money were being hidden away in tax shelters, instead of being invested in the private economy. The problem was that the rate itself was too high and so loopholes were found and investment was diverted. A confusion, that Sowell points out is that there is a confusion between what constitutes ‘tax rates’ and ‘tax revenues’. The tax rate is not the same as the tax revenue. Sowell (11) notes, "The real effect of tax rate reductions is to make the future prospects of profit look more favorable, leading to more current investments that generate more current economic activity and more jobs.” which will increase tax revenue that is collected, due to greater investment in the economy.
January 8, 2018
Thomas Sowell clearly and logically refutes criticisms of income tax rate reductions. Dr. Sowell backs up his support for his argument in several ways. All of his arguments are convincing, but there are three that seem particularly persuasive to me.
First he points out that the “trickle down” theory is a non-existent theory. No such theory has been found in the history of economic theories, either in name or in essence. "Trickle down" is a mischaracterization of tax reduction policies that misstates both their intent and the normal result of their implementation. One of the first uses of the term “trickle down” was by Franklin D. Roosevelt’s speechwriter Samuel Rosenman, who referred to “the theory that had prevailed in Washington since 1921, that the object of government was to provide prosperity for those who lived and worked at the top of the economic pyramid, in the belief that prosperity would trickle down to the bottom of the heap and benefit all.” Mr. Sowell points out that this was neither the intent nor the result of the income tax reductions of the 1920s. First of all, income tax rates were increased to high levels in the belief that this would help finance World War I. Unfortunately this resulted in investments of the wealthy being directed to tax-exempt municipal bonds and other tax shelters. President Calvin Coolidge and Secretary of the Treasury Andrew Mellon considered this unfair and implemented sharper percentage cuts in tax rates at the lower income levels. They attempted to find the tax rates that would produce the most tax revenues and they succeeded in increasing tax revenues by reducing tax rates.
Secondly, Dr. Sowell points out that efforts to increase income tax revenues through reducing income tax rates, have been successful. Reduced income tax rates in the 1920s resulted in rising output, rising employment, rising incomes and rising tax revenues for the government. There were similar results following the income tax rate reductions implemented during the administrations of John Kennedy, Ronald Reagan, and George W. Bush.
Thirdly, he points out that, even though low income tax rates now seem to be a partisan issue, throughout the twentieth century they were supported by liberal economists, such as John Maynard Keynes, and Democrats, including presidents Woodrow Wilson and John Kennedy. Unfortunately, many people continue to be confused about the difference between reducing tax rates on taxpayers and reducing tax revenues received by the government. Dr. Sowell points out that part of the problem is that several widely used textbooks perpetuate this confusion by misstating the goals and results of twentieth century income tax rate reductions. A lot of this confusion could be eliminated if Dr. Sowell’s essay were required reading instead.
First he points out that the “trickle down” theory is a non-existent theory. No such theory has been found in the history of economic theories, either in name or in essence. "Trickle down" is a mischaracterization of tax reduction policies that misstates both their intent and the normal result of their implementation. One of the first uses of the term “trickle down” was by Franklin D. Roosevelt’s speechwriter Samuel Rosenman, who referred to “the theory that had prevailed in Washington since 1921, that the object of government was to provide prosperity for those who lived and worked at the top of the economic pyramid, in the belief that prosperity would trickle down to the bottom of the heap and benefit all.” Mr. Sowell points out that this was neither the intent nor the result of the income tax reductions of the 1920s. First of all, income tax rates were increased to high levels in the belief that this would help finance World War I. Unfortunately this resulted in investments of the wealthy being directed to tax-exempt municipal bonds and other tax shelters. President Calvin Coolidge and Secretary of the Treasury Andrew Mellon considered this unfair and implemented sharper percentage cuts in tax rates at the lower income levels. They attempted to find the tax rates that would produce the most tax revenues and they succeeded in increasing tax revenues by reducing tax rates.
Secondly, Dr. Sowell points out that efforts to increase income tax revenues through reducing income tax rates, have been successful. Reduced income tax rates in the 1920s resulted in rising output, rising employment, rising incomes and rising tax revenues for the government. There were similar results following the income tax rate reductions implemented during the administrations of John Kennedy, Ronald Reagan, and George W. Bush.
Thirdly, he points out that, even though low income tax rates now seem to be a partisan issue, throughout the twentieth century they were supported by liberal economists, such as John Maynard Keynes, and Democrats, including presidents Woodrow Wilson and John Kennedy. Unfortunately, many people continue to be confused about the difference between reducing tax rates on taxpayers and reducing tax revenues received by the government. Dr. Sowell points out that part of the problem is that several widely used textbooks perpetuate this confusion by misstating the goals and results of twentieth century income tax rate reductions. A lot of this confusion could be eliminated if Dr. Sowell’s essay were required reading instead.
April 23, 2019
Bosh
This author is usually spot on. However, he cites only information to support his pre-determined opinion. He omits quotes from Adam Smith! Author of The Wealth Of Nations, and widely regarded as the Bible of capitalism, Sowell never cites his views on taxation! Incredible! Had he researched this, his views would be in stark contrast. Further, he uses examples from history where results have been attributed to other factors. And even those examples are few and far between. I was greatly disappointed in this book, and it has led me to question Sowell’s other books. Sowell has been watching too much Fox News.
This author is usually spot on. However, he cites only information to support his pre-determined opinion. He omits quotes from Adam Smith! Author of The Wealth Of Nations, and widely regarded as the Bible of capitalism, Sowell never cites his views on taxation! Incredible! Had he researched this, his views would be in stark contrast. Further, he uses examples from history where results have been attributed to other factors. And even those examples are few and far between. I was greatly disappointed in this book, and it has led me to question Sowell’s other books. Sowell has been watching too much Fox News.
August 16, 2018
This short read succinctly explains how lower tax rates actually increase tax revenue for the government. Those that are against tax cuts for the rich focus only on wealth re-distribution, and not on what drives productivity.
I wonder how there can be so much debate in the last century among intellectuals when the data doesn't lie.
I wonder how there can be so much debate in the last century among intellectuals when the data doesn't lie.
September 26, 2019
Though generally reasonable in its claims, this essay addresses nothing beyond the concept of the Laffer Curve, and uses far more words than necessary to do so. This is far from Sowell's best work.
August 3, 2020
Interesting read, but for something published in 2012 this is defs lacking in supporting evidence. Sowell loves to quote stats from the early 20th century and rarely references data contemporaneous with the issues discussed. TBF maybe we haven't had any tax cuts recently who knows
Anyway, there was a lot that was interesting (caveat * I'm really dumb and I get my dog to do my tax returns so I really don't know what I'm talking about):
1. Trickle-down economics is a caricature/strawman. I actually agree with this
2. Tax cuts - as a means of increasing total tax collected - has received bipartisan support in the past, and should not be blindly associated with Republican economics
3. The empirical evidence cited in this actually shows that both the $ tax collected & % tax revenues contributed by the rich increase with tax cuts. Why? Apparently people don't want to pay 75% tax and will employ the use of tax-exempt securities, trusts, etc. to avoid tax, but when it's something more palatable like 24% they'll happily pay their taxes. I can't really wrap my head around the stats that show people are actually okay with declaring their high taxable incomes when taxes are lowered. Wouldn't they try to dodge tax regardless?
4. Possibly most interesting to me was the misalignment in what is tax-exempt and what is economically productive investment. Historically, municipal bonds & T-notes have been classified as tax-exempt securities, which in periods of high taxes have attracted significant investment. This is obviously dumb bcos money sitting in tax shelters will not create nearly as much economic activity as productive investment [a creative solution via incentivisation likely lives in this thread]
5. Capital flows to the most favourable environment. The simplest example is of course interest rates: investors will put their money wherever they can get the best return. The same holds true when comparing international tax environments: capital will be invested wherever the tax is lowest. Unfortunately, it is mostly the rich (corporations and individuals) who will have access to investing in other geographies, whilst the unemployed are deprived of the economic prosperity which would have been generated by domestic investment
6. Why not just legislate away the loopholes and make everyone pay their taxes? haha
7. It would seem that the Scandanavian countries are examples of high-tax environments that work well without discouraging investment and economic growth. Is this the case? Why? Actually I reckon Denmark/Sweden are the best arguments against any of Friedman's/Sowell's propositions (but I should actually read a bit on how things work over there)
8. This made me think of TikTok comments like "eat the rich <3" or "Jeff Bezos has no business being that rich and has only gotten that rich by exploiting workers with pitiable wages". Implicit in these comments is a 'zero-sum' conception of the economy. Now I am not an advocate of Amazon (idk what they pay their staff, and minimum wage is another issue entirely) but what Sowell says is "These people show a preoccupation with the distribution of wealth and pay absolutely no attention to the factors that are required to create wealth" which I absolutely agree with. Stop demonising the rich before trying to understand how things work
Anyway, there was a lot that was interesting (caveat * I'm really dumb and I get my dog to do my tax returns so I really don't know what I'm talking about):
1. Trickle-down economics is a caricature/strawman. I actually agree with this
2. Tax cuts - as a means of increasing total tax collected - has received bipartisan support in the past, and should not be blindly associated with Republican economics
3. The empirical evidence cited in this actually shows that both the $ tax collected & % tax revenues contributed by the rich increase with tax cuts. Why? Apparently people don't want to pay 75% tax and will employ the use of tax-exempt securities, trusts, etc. to avoid tax, but when it's something more palatable like 24% they'll happily pay their taxes. I can't really wrap my head around the stats that show people are actually okay with declaring their high taxable incomes when taxes are lowered. Wouldn't they try to dodge tax regardless?
4. Possibly most interesting to me was the misalignment in what is tax-exempt and what is economically productive investment. Historically, municipal bonds & T-notes have been classified as tax-exempt securities, which in periods of high taxes have attracted significant investment. This is obviously dumb bcos money sitting in tax shelters will not create nearly as much economic activity as productive investment [a creative solution via incentivisation likely lives in this thread]
5. Capital flows to the most favourable environment. The simplest example is of course interest rates: investors will put their money wherever they can get the best return. The same holds true when comparing international tax environments: capital will be invested wherever the tax is lowest. Unfortunately, it is mostly the rich (corporations and individuals) who will have access to investing in other geographies, whilst the unemployed are deprived of the economic prosperity which would have been generated by domestic investment
6. Why not just legislate away the loopholes and make everyone pay their taxes? haha
7. It would seem that the Scandanavian countries are examples of high-tax environments that work well without discouraging investment and economic growth. Is this the case? Why? Actually I reckon Denmark/Sweden are the best arguments against any of Friedman's/Sowell's propositions (but I should actually read a bit on how things work over there)
8. This made me think of TikTok comments like "eat the rich <3" or "Jeff Bezos has no business being that rich and has only gotten that rich by exploiting workers with pitiable wages". Implicit in these comments is a 'zero-sum' conception of the economy. Now I am not an advocate of Amazon (idk what they pay their staff, and minimum wage is another issue entirely) but what Sowell says is "These people show a preoccupation with the distribution of wealth and pay absolutely no attention to the factors that are required to create wealth" which I absolutely agree with. Stop demonising the rich before trying to understand how things work
This entire review has been hidden because of spoilers.
September 27, 2020
This is the first of many Thomas Sowell books that I have purchased and want to read. This is a very short 13 page explanation of these two topics, “Trickle Down Theory” and “Tax Cuts For The Rich," which have been so often used by Democrats to criticize Republican implemented tax cuts. In this short few pages I have learned the following:
The “trickle down theory” has never been found in even the most voluminous and learned histories of economic theories, including J.A. Schumpeter's monumental 1,260-page History of Economic Analysis. Yet this NON-EXISTENT THEORY has become the object of denunciations from the pages of the New York Times and the Washington Post to the political arena. It is a classic example of arguing against a CARICATURE instead of confronting the argument actually made.
Yes, when there are tax cuts the rich do get tax cuts, but not only do they get tax cuts lower income people do too. Yes, the rich make more money so the tax cuts allow them to keep more money, that only makes sense. It is NOT TRUE that the lower income people carry the burden of these tax cuts. Here's the deal – when the rich get taxed too highly they have the option to invest their money in tax-free bonds and securities, therefore they find a way out of the high tax rates and end up contributing less to the tax revenues for the government than they do when they pay lower taxes. But lower income people most often don't have that option so that is when the burden of generating tax revenues for the government is placed on them, WHEN TAXES ARE HIGH. This has been proven out over and over since the 1920's. Here is the kicker that makes me SO mad......even though it has been proven that tax cuts are beneficial to all and high taxes put the burden of tax revenues on the lower income people the opposite untruthful "Trickle Down Theory" and "Tax Cuts For The Rich" has been taught in our public school textbooks, written by various well-known historians. This concept of “tax cuts for the rich” and the “trickle down theory” has continued to be grossly misstated in textbooks that have been used not only in the primary public schools but in our colleges also. Widely used textbooks such as “These United States,” “The American Nation,” The American Pageant” have taught American students the lies that are perpetuated by the liberal left concerning economics and government, in particular about taxes and these young people in their adulthood don't even realize that their public school textbooks have brainwashed them on these subjects. So frustrating!!
This little booklet should be required reading for all students and all Americans who care about our country. In these pages they will finally know the truth about the deceit that has gone on in the teaching of our students for many years.
The “trickle down theory” has never been found in even the most voluminous and learned histories of economic theories, including J.A. Schumpeter's monumental 1,260-page History of Economic Analysis. Yet this NON-EXISTENT THEORY has become the object of denunciations from the pages of the New York Times and the Washington Post to the political arena. It is a classic example of arguing against a CARICATURE instead of confronting the argument actually made.
Yes, when there are tax cuts the rich do get tax cuts, but not only do they get tax cuts lower income people do too. Yes, the rich make more money so the tax cuts allow them to keep more money, that only makes sense. It is NOT TRUE that the lower income people carry the burden of these tax cuts. Here's the deal – when the rich get taxed too highly they have the option to invest their money in tax-free bonds and securities, therefore they find a way out of the high tax rates and end up contributing less to the tax revenues for the government than they do when they pay lower taxes. But lower income people most often don't have that option so that is when the burden of generating tax revenues for the government is placed on them, WHEN TAXES ARE HIGH. This has been proven out over and over since the 1920's. Here is the kicker that makes me SO mad......even though it has been proven that tax cuts are beneficial to all and high taxes put the burden of tax revenues on the lower income people the opposite untruthful "Trickle Down Theory" and "Tax Cuts For The Rich" has been taught in our public school textbooks, written by various well-known historians. This concept of “tax cuts for the rich” and the “trickle down theory” has continued to be grossly misstated in textbooks that have been used not only in the primary public schools but in our colleges also. Widely used textbooks such as “These United States,” “The American Nation,” The American Pageant” have taught American students the lies that are perpetuated by the liberal left concerning economics and government, in particular about taxes and these young people in their adulthood don't even realize that their public school textbooks have brainwashed them on these subjects. So frustrating!!
This little booklet should be required reading for all students and all Americans who care about our country. In these pages they will finally know the truth about the deceit that has gone on in the teaching of our students for many years.
February 2, 2025
Very Interesting Historical Analysis
Thomas Sowell has a rare gift for clearly distilling complex issues and explaining them in simple terms without actually dumbing them down. This essay is a great example: he takes a complex, emotionally & and politically charged issue like tax cuts for high income earners, and breaks down the last century of experience with tax rates vs tax revenues in the U.S. I really enjoyed his writing style and his analysis on the subject.
That being said, I have two criticisms of his essay, both somewhat related. The first is that he is obviously cherry-picking his examples in support of his conclusion. This is to be somewhat expected given that this essay is meant to be short rather than an exhaustive summary of 20th century taxes, but still I can't help but wonder if his conclusions would still hold if he expanded his analysis to include every year for which data is available. I suspect it wouldn't, which leads me to my second criticism.
This essay seems to acknowledge only in passing that his analysis is deliberately simplistic, and therefore, his conclusion is not as strong or well-suppoerted when considered in the full context of history. In particular, he briefly mentions a few times that the examples of lower tax rates he looks at were instances of government using taxes to incentivize behavior that increases economic growth in general terms. Unsaid but implicit in those examples is that there could be a myriad other reasons why governments may reduce taxes. Similarly, he briefly mentions once or twice that people generally want to avoid paying taxes as much as possible, and the wealthier someone is the more they can afford to to pay to avoid having to pay taxes. Left unsaid, then, are the possibilities and dangers of a wealthy oligarchy exerting outsized influence on our political systems to shield their wealth from taxes and simultaneously strengthen the moat around their businesses to ward-off competition. In other words, keeping taxes low without incentivizing any increase in investments.
My own personal takeaway from this essay is that tax cuts can be generally beneficial to society as a whole in many more ways than just "trickle-down economics," but also that not all tax cuts are created equal. And although we should not allow ourselves to be duped by the popular strawmen "tax cuts for the rich" and "trickle-down economics," we should also remain vigilant against false promises of future riches that will surely be unlocked by lower tax rates!
Thomas Sowell has a rare gift for clearly distilling complex issues and explaining them in simple terms without actually dumbing them down. This essay is a great example: he takes a complex, emotionally & and politically charged issue like tax cuts for high income earners, and breaks down the last century of experience with tax rates vs tax revenues in the U.S. I really enjoyed his writing style and his analysis on the subject.
That being said, I have two criticisms of his essay, both somewhat related. The first is that he is obviously cherry-picking his examples in support of his conclusion. This is to be somewhat expected given that this essay is meant to be short rather than an exhaustive summary of 20th century taxes, but still I can't help but wonder if his conclusions would still hold if he expanded his analysis to include every year for which data is available. I suspect it wouldn't, which leads me to my second criticism.
This essay seems to acknowledge only in passing that his analysis is deliberately simplistic, and therefore, his conclusion is not as strong or well-suppoerted when considered in the full context of history. In particular, he briefly mentions a few times that the examples of lower tax rates he looks at were instances of government using taxes to incentivize behavior that increases economic growth in general terms. Unsaid but implicit in those examples is that there could be a myriad other reasons why governments may reduce taxes. Similarly, he briefly mentions once or twice that people generally want to avoid paying taxes as much as possible, and the wealthier someone is the more they can afford to to pay to avoid having to pay taxes. Left unsaid, then, are the possibilities and dangers of a wealthy oligarchy exerting outsized influence on our political systems to shield their wealth from taxes and simultaneously strengthen the moat around their businesses to ward-off competition. In other words, keeping taxes low without incentivizing any increase in investments.
My own personal takeaway from this essay is that tax cuts can be generally beneficial to society as a whole in many more ways than just "trickle-down economics," but also that not all tax cuts are created equal. And although we should not allow ourselves to be duped by the popular strawmen "tax cuts for the rich" and "trickle-down economics," we should also remain vigilant against false promises of future riches that will surely be unlocked by lower tax rates!
July 16, 2018
What followed the cuts in tax rates in the 1920s were rising output, rising employment to produce the output, rising incomes as a result and rising tax revenues for the government because of the rising incomes, even though the tax rates had been lowered. Another consequence was that people in higher income brackets not only paid a larger total amount of taxes, but a higher percentage of all taxes, after what have been called “tax cuts for the rich.” There were somewhat similar results in later years after high tax rates were cut during the John F. Kennedy, Ronald Reagan and George W bush administration's. After the 1920s tax cuts, it was not simply that investors’ incomes rose but that this was now taxable income, since the lower tax rates made it profitable for investors to get higher returns by investing outside of tax shelters.
In 1921, when the tax rate on people making over $100,000 a year with 73%, the federal government collected a little over 700 million in income tax, of which 30% was paid by those making over $100,000. By 1929, after a series of tax rate reductions had cut the tax rate to 24% on those making over $100,000, the federal government collected more than a billion dollars in income taxes, of which 65% was collected from those making over $100,000.
Under the sharply rising tax rates during the Woodrow Wilson Administration, to pay for the first world war, fewer and fewer people reported higher taxable incomes, whether by putting their money into tax exempt Securities or by any of the other ways of rearranging their financial affairs to minimize their tax liability. The total amount of taxable income earned by people making over $300,000 declined by more than four-fifths during those years (3). By the Treasury Department’s estimate, the money invested in tax-exempt Securities had nearly tripled in a decade (4). In other words, higher tax rates that many people avoid paying do not necessarily bring in as much revenue to the government as lower tax rates that more people are in fact paying, when these lower tax rates make it safe to invest their money where they can get a higher rate of return in the economy then they get from tax exempt securities (5). there were 200 six people who reported annual taxable incomes of $1000000 or more in 1916. But, as the tax rates rolls, that number Phil drastically, to just 21 people by 1921. Then, after a series of tax rate Cuts during the 1920s, the number of individuals reporting taxable incomes of a million dollars or more rose again to 207 by 1925.
“The point here is not simply that the weight of evidence is on one side of the argument rather than the other but, more fundamentally, that there was no serious engagement with the argument actually advanced but instead an evasion of those arguments by depicting them as simply a way of transferring tax burden is on the rich the other taxpayers.”
Repeatedly, over the years, the arguments of the proponents and opponents of tax rate reductions have been arguments about two fundamentally different things. Proponents of tax rate cuts base their arguments on anticipated changes in Behavior by investors and response to reduce income tax rates. Opponents of tax cuts a tribute to the proponents a desire to see higher income taxpayers have more after-tax income, so that their prosperity will somehow “ trickle-down” two others, which opponents of tax cuts deny will happen (6).
Words by Woodrow Wilson (Democrat) in 1919 message to Congress (7):
“There was a point at which and peace times High rates of income and profits taxes discourage energy, remove the incentive to new enterprise, encourage extravagant expenditures, and produce industrial stagnation would consequent unemployment other attendant evils.”
In 1962, Democratic president John F Kennedy, like Democratic and Republican presidents and Secretary of the Treasury in earlier years, pointed out that “ it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the Sounders way to raise the revenues in the long run is to cut the rates now.” (8) Kennedy also said that the “purpose of cutting taxes” is “to achieve the more prosperous, expanding economy.”
In short, neither of these earlier nor later arguments for cuts and tax rates have anything to do with making some people more prosperous, so that their prosperity might “ trickle down” to others. But tempirical evidence on what was was actually said and done, as well as the actual consequences of tax cuts and four different administrations over a span of more than 80 years have also been largely ignored by those opposed to what they call “ tax cuts for the rich.” (9)
In 1921, when the tax rate on people making over $100,000 a year with 73%, the federal government collected a little over 700 million in income tax, of which 30% was paid by those making over $100,000. By 1929, after a series of tax rate reductions had cut the tax rate to 24% on those making over $100,000, the federal government collected more than a billion dollars in income taxes, of which 65% was collected from those making over $100,000.
Under the sharply rising tax rates during the Woodrow Wilson Administration, to pay for the first world war, fewer and fewer people reported higher taxable incomes, whether by putting their money into tax exempt Securities or by any of the other ways of rearranging their financial affairs to minimize their tax liability. The total amount of taxable income earned by people making over $300,000 declined by more than four-fifths during those years (3). By the Treasury Department’s estimate, the money invested in tax-exempt Securities had nearly tripled in a decade (4). In other words, higher tax rates that many people avoid paying do not necessarily bring in as much revenue to the government as lower tax rates that more people are in fact paying, when these lower tax rates make it safe to invest their money where they can get a higher rate of return in the economy then they get from tax exempt securities (5). there were 200 six people who reported annual taxable incomes of $1000000 or more in 1916. But, as the tax rates rolls, that number Phil drastically, to just 21 people by 1921. Then, after a series of tax rate Cuts during the 1920s, the number of individuals reporting taxable incomes of a million dollars or more rose again to 207 by 1925.
“The point here is not simply that the weight of evidence is on one side of the argument rather than the other but, more fundamentally, that there was no serious engagement with the argument actually advanced but instead an evasion of those arguments by depicting them as simply a way of transferring tax burden is on the rich the other taxpayers.”
Repeatedly, over the years, the arguments of the proponents and opponents of tax rate reductions have been arguments about two fundamentally different things. Proponents of tax rate cuts base their arguments on anticipated changes in Behavior by investors and response to reduce income tax rates. Opponents of tax cuts a tribute to the proponents a desire to see higher income taxpayers have more after-tax income, so that their prosperity will somehow “ trickle-down” two others, which opponents of tax cuts deny will happen (6).
Words by Woodrow Wilson (Democrat) in 1919 message to Congress (7):
“There was a point at which and peace times High rates of income and profits taxes discourage energy, remove the incentive to new enterprise, encourage extravagant expenditures, and produce industrial stagnation would consequent unemployment other attendant evils.”
In 1962, Democratic president John F Kennedy, like Democratic and Republican presidents and Secretary of the Treasury in earlier years, pointed out that “ it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the Sounders way to raise the revenues in the long run is to cut the rates now.” (8) Kennedy also said that the “purpose of cutting taxes” is “to achieve the more prosperous, expanding economy.”
In short, neither of these earlier nor later arguments for cuts and tax rates have anything to do with making some people more prosperous, so that their prosperity might “ trickle down” to others. But tempirical evidence on what was was actually said and done, as well as the actual consequences of tax cuts and four different administrations over a span of more than 80 years have also been largely ignored by those opposed to what they call “ tax cuts for the rich.” (9)
October 25, 2020
Valid with Brevity and Logical for the Layman
I chose to rate this paper, or short book, 5 stars because it did what I believe it was intended to do: to educate, in a very succinct way, on how tax cuts impact the entire economy and not just a particular targeted segment: the rich.
What I really like about this book is that as it is presenting you the reasonings why tax cuts for the wealthy are beneficial for the middle and lower class, at the same time, it also presents a clear historical pattern - which can easily be seen by the mind's eye - that correlates with what happens to the US economy with regards to tax cuts or tax increases.
One can see the this viewpoint happening within the present day. For instance, billionaire Paul Singer is in the process of moving the headquarters of his hedge fund (Elliott Management) from Manhattan, New York to South Florida. He's moving from a tax burden state (NY) to a lower tax state (FL); thus, one local economy gains while the other loses.
When this principle is applied on a larger scale and not beholden to a particular state, the local economies then become the national economies that begin to suffer the losses of input and production because the tax burdened investments went to an offshore tax haven (lower taxes) .
This same principle applies to the everyday person: when mortgage interest rates are high, we normally will not invest our money into the real estate market, but when mortgage interest rates are low people are more than willing to pour their money into the market - whether it be for a personal purchase or an investment.
I would recommend this to anyone who wants to quickly gain a bird's eye view regarding the arguments against tax cuts. For me, the argument is valid, as tax increases cause more harm, than good, for everyone.
I chose to rate this paper, or short book, 5 stars because it did what I believe it was intended to do: to educate, in a very succinct way, on how tax cuts impact the entire economy and not just a particular targeted segment: the rich.
What I really like about this book is that as it is presenting you the reasonings why tax cuts for the wealthy are beneficial for the middle and lower class, at the same time, it also presents a clear historical pattern - which can easily be seen by the mind's eye - that correlates with what happens to the US economy with regards to tax cuts or tax increases.
One can see the this viewpoint happening within the present day. For instance, billionaire Paul Singer is in the process of moving the headquarters of his hedge fund (Elliott Management) from Manhattan, New York to South Florida. He's moving from a tax burden state (NY) to a lower tax state (FL); thus, one local economy gains while the other loses.
When this principle is applied on a larger scale and not beholden to a particular state, the local economies then become the national economies that begin to suffer the losses of input and production because the tax burdened investments went to an offshore tax haven (lower taxes) .
This same principle applies to the everyday person: when mortgage interest rates are high, we normally will not invest our money into the real estate market, but when mortgage interest rates are low people are more than willing to pour their money into the market - whether it be for a personal purchase or an investment.
I would recommend this to anyone who wants to quickly gain a bird's eye view regarding the arguments against tax cuts. For me, the argument is valid, as tax increases cause more harm, than good, for everyone.
May 10, 2021
Sowell's book doesn't necessarily argue that "Trickle Down Theory" is the the end all be all of economic theory. His assertion is that arguments against are a caricature of what the theory actually is. "Trickle Down Theory" in and of itself is a mischaracterization as zero economists have advocated a theory actually named that.
Although I don't think he mentions, the theory being distorted is supply side economics. Sowell goes into hard economic data that shows evidence that lowering tax rates have indeed led to an increase of the collection of tax revenues. There is plenty of evidence presented that shows behavioral changes led to the increase of economic activity, income, as well as revenues. He shows that textbooks, professors, journalists, and politicians rarely review the evidence and use provocative slogans like "Tax Cuts for the Rich."
I think Sowell sums the argument of the article here: "The point here is not simply that the weight of evidence is on one side of the argument rather than the other but, more fundamentally, that there was no serious engagement with the arguments actually advanced but instead an evasion of those arguments by depicting them as simply a way of transferring tax burdens from the rich to other taxpayers."
Although I don't think he mentions, the theory being distorted is supply side economics. Sowell goes into hard economic data that shows evidence that lowering tax rates have indeed led to an increase of the collection of tax revenues. There is plenty of evidence presented that shows behavioral changes led to the increase of economic activity, income, as well as revenues. He shows that textbooks, professors, journalists, and politicians rarely review the evidence and use provocative slogans like "Tax Cuts for the Rich."
I think Sowell sums the argument of the article here: "The point here is not simply that the weight of evidence is on one side of the argument rather than the other but, more fundamentally, that there was no serious engagement with the arguments actually advanced but instead an evasion of those arguments by depicting them as simply a way of transferring tax burdens from the rich to other taxpayers."
August 17, 2024
This is a very short essay (20 pages on my iPhone audiobook app) about “trickle down economics” and how that gets characterized as “tax cuts for the rich”.
I found the argument very compelling, but wish more data was used. The overall thesis was that despite tax rates being lower in the 1920s, more tax revenue was collected than when higher tax rates were used due to the fact that economic behavior changed, allowing more investment in capital and other economic spurring activities. Makes sense.
Interesting data point, but I also couldn’t help but remember that two MAJOR outliers sandwiched this time period—World War I and the economic crash at the end of the decade. It would be helpful to see more data such as the 1980s.
The George W. Bush era was also cited, briefly, as having brought in more tax revenue with lower tax rates. The problem? Once again, an economic crash followed in ‘08.
Maybe these two points are unrelated (‘08 was affected by the housing crisis), but I would’ve liked to see rebuttals against this fact.
Overall, it was a helpful essay to understand the actual logic behind “trickle down economics” and how, in best case scenarios, the middle class receives a tax break.
I found the argument very compelling, but wish more data was used. The overall thesis was that despite tax rates being lower in the 1920s, more tax revenue was collected than when higher tax rates were used due to the fact that economic behavior changed, allowing more investment in capital and other economic spurring activities. Makes sense.
Interesting data point, but I also couldn’t help but remember that two MAJOR outliers sandwiched this time period—World War I and the economic crash at the end of the decade. It would be helpful to see more data such as the 1980s.
The George W. Bush era was also cited, briefly, as having brought in more tax revenue with lower tax rates. The problem? Once again, an economic crash followed in ‘08.
Maybe these two points are unrelated (‘08 was affected by the housing crisis), but I would’ve liked to see rebuttals against this fact.
Overall, it was a helpful essay to understand the actual logic behind “trickle down economics” and how, in best case scenarios, the middle class receives a tax break.
December 18, 2024
Sowell's writings were introduced to me in high school and are a good place to start. They aren't perfect, but if you want to get a good understanding on the differences between Supply-Side and Trickle-Down Economics here you go.
To summarize Supply-Side being the idea of creating more supply to reduce demand (make things cheaper) while Trickle-Down being the idea that cutting taxes for the rich would some how make money piss down on to the face of the common man.
The media and people online will argue in circles about definitions and use semantics and false reasoning. They often times wont even know what they are talking about themselves just thinking its a bad thing. They will hide behind one term or the other when they mean drastically different things.
Situations like these where the terms are this conflated basically leaves them meaningless and Sowell does a good job disentangling the misconceptions here.
10/10 would read again. Also Political Juice (before he deleted his channel) had a good summary video on this book. It was called "The Myth of Trickle Down Economics" and is a good place to get a gist for what Sowell wrote about. That is if you can find re-uploads of course.
To summarize Supply-Side being the idea of creating more supply to reduce demand (make things cheaper) while Trickle-Down being the idea that cutting taxes for the rich would some how make money piss down on to the face of the common man.
The media and people online will argue in circles about definitions and use semantics and false reasoning. They often times wont even know what they are talking about themselves just thinking its a bad thing. They will hide behind one term or the other when they mean drastically different things.
Situations like these where the terms are this conflated basically leaves them meaningless and Sowell does a good job disentangling the misconceptions here.
10/10 would read again. Also Political Juice (before he deleted his channel) had a good summary video on this book. It was called "The Myth of Trickle Down Economics" and is a good place to get a gist for what Sowell wrote about. That is if you can find re-uploads of course.
February 11, 2024
"Trickle Down Theory and Tax Cuts for the Rich" by Thomas Sowell presents a compelling defense of supply-side economics, arguing that policies benefiting the wealthy can lead to overall economic growth. Sowell's lucid writing style makes complex economic concepts accessible to a wide audience, and his historical examples provide context. However, the book's one-sided perspective can be a drawback, as it tends to oversimplify complex economic issues. Critics argue that the real-world impact of trickle-down economics is more nuanced than Sowell suggests, with concerns about income inequality and the concentration of wealth. Additionally, the book lacks a thorough exploration of alternative economic theories, leaving readers with a somewhat skewed view. While Sowell's work may sound like a provocative take, a more balanced approach would enhance its credibility and relevance in the ongoing economic discourse.
October 26, 2025
A quick essay, really more like a fact sheet with a bit of logic added. Sowell notes opposing ideological factions talking past each other when it comes to tax policy and expected economic outcomes. He points out that there is no articulated "trickle down theory" in economics, this being a term exclusively used as a criticism by those that oppose economic growth theories and first coined by a speechwriter (vice economist). Those that adhere to a Laffer curve understanding of tax policy may favor tax cuts to increase the collection of tax revenue, while others will accuse them of providing tax cuts for the rich. The statistics cited within show how three major tax cuts led to not only an increase in tax revenue collected but also paid by the rich as a much higher percentage, which was exactly what the proponents predicted and contrary to the critical rhetoric. It is typical Sowell in terms of being very fact-focused and logical. A quick read with all sources cited.
Read
April 22, 2023A short but well-written pamphlet to show that 'trickle-down economics' is a total caricature and a strawman, a theory which is not advocated by anyone. This quote from President Calvin Coolidge sums up the proposal that is so often caricatured in this way:
'The first object of taxation is to secure revenue. When the taxation of large incomes is approached with this in view, the problem is to find a rate which will produce the largest returns. Experience does not show that the higher rate produces the larger revenue. . . .
I agree perfectly with those who wish to relieve the small taxpayer by getting the largest possible contribution from the people with large incomes. But if the rates on large incomes are so high that they disappear [into tax shelters], the small taxpayer will be left to bear the entire burden.'
'The first object of taxation is to secure revenue. When the taxation of large incomes is approached with this in view, the problem is to find a rate which will produce the largest returns. Experience does not show that the higher rate produces the larger revenue. . . .
I agree perfectly with those who wish to relieve the small taxpayer by getting the largest possible contribution from the people with large incomes. But if the rates on large incomes are so high that they disappear [into tax shelters], the small taxpayer will be left to bear the entire burden.'
June 8, 2025
This is a Text Book Case of Data Cherry Picking
Run a simple query in Perplexity, ChatGPT, or other LLM. You will quickly see the anomalies between the 1920’s, 2000’s, and 2017. The tax base was very low in the 20’s and broader in our modern, mature economy. As Sowell will himself argue, “debt service” will reduce capital in the system for “productive” investments. Recent tax cuts have led to “short term” bursts of economic activity (pyramid scheme) but have dramatically increased debt loads and benefits to upper and highest tax quintiles. Tax reduction w/o concommitant action on the debt front and restriction of tax free investments will no longer lead to sustainable economic growth or increase tax revenue long term. These actions are performative stunts based on success in an era of growth over 100 years ago.
Run a simple query in Perplexity, ChatGPT, or other LLM. You will quickly see the anomalies between the 1920’s, 2000’s, and 2017. The tax base was very low in the 20’s and broader in our modern, mature economy. As Sowell will himself argue, “debt service” will reduce capital in the system for “productive” investments. Recent tax cuts have led to “short term” bursts of economic activity (pyramid scheme) but have dramatically increased debt loads and benefits to upper and highest tax quintiles. Tax reduction w/o concommitant action on the debt front and restriction of tax free investments will no longer lead to sustainable economic growth or increase tax revenue long term. These actions are performative stunts based on success in an era of growth over 100 years ago.
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