Signs of Dissent: Do You Feel the Wealth Trickle Down?

Welcome back to The Atlantic Signs of Dissent Project, where we bring economic context to some of the most provocative sings of the Occupy Wall Street movement. Yesterday we launched the project by explaining a sign about student loans, which have, astoundingly, quintupled in the last 12 years. Now let's get to one of the major themes of the movement: the runaway wealth of the top 1%.

David Shankbone:Flickr.png
David Shankbone/Flickr

"Trickle-down" theory holds that tax cuts for the wealthy will benefit the whole economy because new wealth at the top will circulate throughout the market and find its way into the pockets of the middle class. In the last ten years, Washington has cut taxes on income and investment, reducing the effective tax rate of the wealthiest one percent to its lowest rate in decades. (Every other percentile has gotten a big tax cut, too. Average federal income tax for a median family of four is lower than any point since the 1950s.)

Did the wealth trickle down? Well, it's impossible to know the true degree to which the Reagan and Bush tax cuts have stimulated, or not stimulated, the economy in the last decade. We can't run a control experiment on what the 2000s would have looked like without President Bush. But the evidence we have suggests the last ten years have been extremely disappointing. Book-ended by two recessions, Bush's tenure saw average GDP growth barely above 2%, below its 20th century average. For the median household, it was a lost decade. While Bush was in office, Ron Brownstein reported, the median household income declined, poverty increased, childhood poverty increased even more, and the number of Americans without health insurance spiked. And to think: Bush left office before the recession reached its nadir in terms of income and employment losses.

Since the Reagan tax cuts of 1981, after-tax income of the top 1 percent has increased more than 11 times more than the middle fifth of households, according to the Center on Budget and Policy Priorities. Much of this is natural. Capitalism inevitably produces unequal returns. A global economy will reward superstars with outsized gains. The commoditization of labor through automation and offshoring is holding down middle-class incomes, and this has little to do with marginal tax rates.

At the same time, some policies have probably contributed to this inequality of wealth. For example, deregulation in the banking sector combined with lower taxes on capital gains has sparked the enormous growth of financial sector wealth in the last 15 years, especially. 

The upshot is that the evidence suggests "trickle-down" theory hasn't worked. But it's not clear how ineffective it was or whether the U.S. economy would be so much better off with a tax code from the 1990s, or 1970s. Basic economic theory suggests that lower tax rates on income and investment should produce more income and more investment. It hasn't worked that way for everybody.

Did I leave something out? Was I unfair? Let me know in the comments.

More from "Signs of Dissent":

"I'm a student with $25,000 in school loans"