The whole theory of “trickle-down economics” was roughly based on the adage that a “rising tide raises all boats”. In other words, if you let the rich make lots of money, that money will trickle down to everyone else.
But according to an amazing new study done by none other than the International Monetary Fund, they got it completely backwards. According to the comprehensive study “there is convincing evidence that lower net inequality is good economics, boosting growth and leading to longer-lasting periods of expansion.”
The study concludes that “redistributing wealth, largely through taxation, does not significantly impact growth unless the intervention is extreme.”
To translate this into language that even Republicans can understand, they offer proof that raising taxes on the rich does not hurt the economy or raise unemployment. In fact, the opposite is true if those taxes are used to lower income inequality. A vibrant middle class increases demand and stimulates the economy.
The stunning bottom line: Raising taxes on the rich actually does a better job of making the rich richer than letting them keep more of their income.
The reason this is true is that income inequality has a significant negative effect on economic growth. And while redistribution (transferring money from the rich to everyone else through taxes) has a tiny — almost statistically insignificant — negative effect, that is swamped by the boost provided by lowering income inequality.
It is a win-win situation. By raising taxes on the rich, everyone gets richer, even the already rich. Or, to stretch the tide analogy, the way to raise all boats is by raising the tide from below. In contrast, trickle down economics is like lifting the yachts in the air, and expecting all the other boats to follow. Not only does it not work, eventually the yachts will crash back into the water.
This agrees with a study I reported on a few years ago, which found that in countries with high income inequality, the rich also suffered. They had a shorter life expectancy and were less happy, compared to countries with smaller income inequality.
And you don’t even have to be some bleeding heart liberal to agree that we need to raise taxes on the rich. You just have to be smart enough to realize that raising taxes on the rich will stimulate the economy and lead to more consumers buying more products, which will lead to more profits for the rich.
After all, being rich is not a zero-sum game. And a rising tide will surely raise everyone’s boat, including the yachts.