Wednesday, September 17, 2008

In defence of trickle-up economics

Today saw a great speech from Nick Clegg at the Lib Dem conference, arguing for tax cuts for low and middle income earners to help meet rising food and fuel costs. The left don't like this because it doesn't involve veneration of the state, and the right don't because they focus their occasional tax cutting efforts at the better off - which is not to suggest that they cut taxes overall in the long run.

The left shouldn't object of course, because they should recognise that fuel and particularly food are even more basic and important than public services like ID cards and wars. But now I want to address why the right shouldn't object either, because this policy will benefit the rich too in the long run.

According to trickle-up economics, what happens when the low and middle income earners have more money in their pockets is that they go out and buy more of the things they need, so that money eventually gets recycled into executive bonuses, dividends, and so forth. So tax cuts for the poor benefit us all in the long run.

Now it should be said that not everybody agrees with trickle-up theory. Some argue that it is just spin for the doctrine that what is good for the poor is good for the country, a doctrine that should be resisted because, er, they aren't poor, or something. 

But seriously, "supply siders" argue for cuts in taxation on profits to encourage investment. But as post-tax profits drive investment, these can also be boosted by boosting pre-tax profits, by leaving ordinary people with more in their pockets to spend. The difference is who gets the direct benefit and who merely gets trickled on, er, or trickled under.

2 comments:

Julian H said...

Oi oi, good to finally meet you yesterday, or in the early hours of today as it may, in fact, have been.

I agree with this post. Always cut from the bottom, methinks.

Just so you know said...

I would have to say that trickle up economics makes alot more sense than trickle down. (Im not saying either is right or wrong) but lowering or even eliminating taxes on the lower 50% and raising them on higher earnings makes much more sense allowing the middle class and poor to spend their money creating demand and jobs where the rich can start more businesses to supply this demand. I would also believe that smaller businesses or new business startups would be much more prone to succeed as more of their money would stay in the business.

More businesses means more competition means prices somewhat kept in check.

Why tax the rich, because thats where the money is right. Its fair because they have the same tax structure as everyone else their (poor) earnings aren't taxed because its progressive. Not too mention their money was probably made because of the middle class and poor buying their products and services. (Ive never heard a poor person say they wouldn't want to be rich because part of their income would be taxed higher.