Trickle-down+Effect

__** Trickle-down Effect **__ __By: Tua__ media type="youtube" key="qwOEXA9tnbY " width="425" height="350" Trickledown effect refers to an economic theory that an increase in wealth of the upper class with eventually trickle down to benefit the remaining population. In this sense, the theory support supply-side benefit such as tax break on corporations and elimination of progressive tax, which will, as argue by its supporter, cause the benefit to trickle to a much wider range of population.
 * Overview **

The idea of this theory is based on the premise that the increase in wealth of the top-earners will be used to stimulate economic activity through investment. These investments will in turn benefit the middle and lower class in the form of demand for workers, creating more job position and decrease unemployment. The increase in number of workers also raise the amount of tax generated, which can be used by the government to develop other sectors, thus benefiting the economy as a whole. Investments in capital goods can also lead to more efficient production and increase consumer’s accessibility to goods.



As well as increasing employment, tax break for the rich can also be argued to spur more economic activity and generate more tax revenue for the government. As seen from the Laffer Curve, which shows relationship between tax rate and revenue, it is possible for tax revenue to increase even if the tax rate decreases. However this second assumption can only be true if the tax rate for the rich is already past the revenue maximizing point. However, if the earlier tax rate was already less than or equal to optimum tax rate, then the revenue generated will decrease.


 * Supports **



The workability of trickle-down effect is depended on the premise that the tax break on the top earner will stimulate domestic investment that can increase productivity in the long run. In this sense, the aggregate demand curve, which has investment as one of its compenents, will shift to the right as the investment increase, leading to increase in productivity and employment as the firms have more available funding to hire more workers. Also, if the investment is made to improve the firm's productive capability, the AS curve can also be shifted to the right, leading to a long term increase in output of the economy. In this sense, the policy may be more beneficial on specific targets such as corporation, which can be granted benefits on certain conditions.

**Criticism **

The trickle down effect had been negatively received, mostly by middle to low class populations, since it is often viewed as a way for the rich to keep the wealth of the nation to themselves. The theory also raises issue with Keynesian school of thought, which prefers a tax cut across the board for all population to encourage spending, rather than investment from top earners. In addition, the real life application of this theory also suffers from 2 main flaws.

I) Despite what was said in the theory, the benefit given to the rich may not necessarily trickle down, depending on their propensity to consume. If most of the benefit are saved then the amount benefit that will trickle will be much smaller. Due to this reason the theory is highly controversial. There is also a doubt that the increase in wealth of the rich can be spent more effectively than funding other governmental development project in the form of tax.



II) The theory also fails to take into account of openness of today’s market, since, depending on where they will invest, the benefit that the rich receive may not necessarily create more job opportunity for middle and lower class in their country. For instance, if the increase in investment and spending are mainly focus abroad then the follow-up benefit will not trickle down to the workers, as illustrated in the cartoon below.




 * Development **



In the term of development, the idea of trickledown effect give support to policies that focus on entirely on the economic outcome, since economic development can and will eventually lead to progress in the other areas. In this sense, according to the theory, optimal level of development can be reached by focusing entirely on economic outcome and let benefit eventually trickle down in the form of employment and increase in tax revenue, which can be used to fund other developmental project that improve human and environmental outcome.

However with very few empirical evidences for the workability of this theory, it was unlikely to be able to function in the real world due to unpredictability of where and how the rich will spend their benefit.

**Real Life Example **

One of the countries to heavily implement the trickle down effect in their policy is the US, which is shown through the continually lower top tier tax rate. Below are graphs that shows that relationship between top tax rate and unemployment and real GDP growth rate. 

<span style="font-family: Arial,Helvetica,sans-serif;">According to the graphs, there seems to be no clear correlation between top tax rate and economic development and neither does the benefit trickle down as employment to the lower class in the form of employment. Although the rate of unemployment and real GDP growth does fluctuate from times to times, they still remain relatively unchanged through out the years, despite the lowering top tax rate.

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 * <span style="font-family: Arial,Helvetica,sans-serif; font-size: 140%;">Further Reading **

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 * <span style="font-family: Arial,Helvetica,sans-serif; font-size: 140%;">Pict﻿ure **

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<span style="font-family: Arial,Helvetica,sans-serif;">Etebari, Mehrun. "Trickle-Down Economics: Four Reasons Why It Just Doesn't Work | United for a Fair Economy." Home | United for a Fair Economy. Web. 24 Jan. 2011. [].
 * <span style="font-family: Arial,Helvetica,sans-serif; font-size: 140%;">References **

<span style="font-family: Arial,Helvetica,sans-serif;">"HowStuffWorks "How Trickle-down Economics Works"" Howstuffworks "Business & Money" Web. 24 Jan. 2011. [].