Trickle-Down Economics theory states that tax cuts can help successful people in the society like businessmen, investors, etc. to increase the economy of the nation. The extra cash they earn will be invested to expand companies which will create jobs for the workers. The workers will spend their salary, leading to a demand, thus resulting in the economic growth. In theory, it sounds great, but does it really work? Who will be benefited from this theory?
Human nature is often greedy, and as the saying goes, ‘Unlimited power leads to corruption’. Trickle-Down Economics puts the future of the nation in the hands of the rich and powerful. Implementing this theory will increase the gap between the rich and the poor. This theory supports lower income tax and capital gains. Even if it reduces unemployment to a certain extent, the upper class will enjoy greater benefits. For instance, U.S. has one of the highest Gross National Income. The upper class will take the maximum profit, and by the time it reaches lower income group, there will be hardly any profit left to be shared with them.
Even if the theory is considered to be true, the economic growth will not be uniform. For instance, if more rich people invest in pharmaceutical companies, it will help a few factory workers. A large section of the money will be taken by the shareholders and executives of the pharmaceutical company. Another drawback to be thought-out is: lowering tax rates can lead to more jobs and increased production, with prices and services coming at a lower price. This would increase the demand for the product. But, what will happen if the consumer does not want the product or cannot afford it? Surplus goods do not do any good. This theory relies too much on the assumption.
As per the theory, reduced regulation means better profits and increase in Gross Domestic Product (GDP). For instance, if the emission regulation for coal power plants is reduced, it will help the coal plants to make more money and electricity will be cheaper. But increased coal burning will lead to respiratory problems or lung cancer. Deregulation can make economy grow, but it can affect the health and standard of living of the population.
Economists are still debating how this theory can lead to increased economic growth in the long term as there is no real proof.