A lot of controversy in economics on the political stage comes from trickle down economics and whether it even works or not. The idea is that if we give sufficient tax cuts to corporations, they'll use that money to expand and create more jobs and just overall bettering the economy for everyone. My question is, why can't that work the other way around? If you give the working class just as much in tax cuts, they'll eventually spend that money to where it does end up at an American corporation. And in my opinion, this way is more capitalist, because the consumers decide what businesses get what percentage of their tax cut, instead of just multiplying the corporation's wealth.
In Keynesian economics, yes, it can work the other way around - in fact, it may even be more effective. I don't have any textbooks or sources handy, but in general, people with lower incomes have a higher marginal propensity to consume. That is, if you give a poor person an extra dollar, they will spend more of that dollar, and save less of it, than someone who is wealthier. Since more of the additional money is spent, the tax cut will have more of a stimulative effect on the economy. In Keynesian terms, the fiscal multiplier will be larger.
Here are some links that go over this in more detail. And if you really want to understand it, any decent macroeconomics textbook should cover this pretty thoroughly.
https://www.investopedia.com/exam-guide/cfa-level-1/macroeconomics/multiplier-effect.asp https://en.wikipedia.org/wiki/Marginal_propensity_to_consume#MPC_and_the_multiplier https://en.wikipedia.org/wiki/Fiscal_multiplier#Marginal_Propensity_to_Consume https://scandalum.wordpress.com/2007/10/17/10-the-marginal-propensity-to-consume-and-the-multiplier/
As you learn more about economics you should gradually come to distinguish the vocabulary of economics from that of politics (which is also not the same as political science). When politicians or political activists speak, they use a variety of terms that are very vaguely defined, and sometimes outright derogatory. They are not actually meant to convey exact economic concepts or ideas, but more like feelings. "Trickle down economics" is an example. "Neo-liberism" is another example. You won't find any formally trained economists discussing "trickle down economics" or "neo-liberist" policies simply because these are not properly defined concepts, i.e. they don't really mean anything specific. In order to discuss productively with economists and generally any scholar from a discipline that is based on the scientific method (biology, physics, statistics, etc.), it is important to acquire the right vocabulary. The dictionary or an encyclopedia is usually a good place to start.
P.S. it is not a coincidence that controversy tends to stir around topics that are not discussed in scientific terms - it is difficult for people to agree on ideas if they can't articulate them :)
The overall effect of reducing tax on a factor of production (or its owner) will depend on at least two things:
- The change in the quantity of the factor used in production in response to the increase in the post-tax factor return.
- The use of the extra disposable income resulting from the tax cut.
The answer by @krock addresses 2. I would just add that whether a tax cut (for corporations or labour) will have a Keynesian type stimulative effect on an economy depends on conditions. It will not have such an effect if the economy is already at full capacity, or if a restrictive monetary policy offsets the effect of the fiscal stimulus.
Focusing now on 1, an increase in the post-tax return to capital is likely, ceteris paribus, to result over time in an increase in the quantity of capital. This is partly because it will encourage savers, seeking the best return subject to prudent diversification, to invest more in productive capital rather than other assets such as housing or government securities. To the extent that financial capital is internationally mobile, it will also encourage more of the investment in productive capital to be in domestic rather than foreign capital. The effect of increasing the quantity of productive capital in the economy, assuming a constant labour supply and assuming a Cobb-Douglas or similar production function, will be to raise the marginal product of labour and therefore (to the extent that the marginal productivity theory of distribution is valid) to raise wages (which could loosely be described as “trickle down”). A mathematical treatment of this process is in Greg Mankiw’s blog (October 18th 2017).
The effect of an increase in the post-tax return to labour, on the other hand, is hard to predict. It raises the opportunity cost of leisure time, which could lead some (if they have a choice) to work more hours. If, in aggregate, hours worked were to increase, then (adapting the above reasoning) the marginal product of capital and therefore the return on capital would increase (which could loosely be described as “trickle up”). However, an increase in the post-tax return to labour would also mean that a desired level of income can be achieved from fewer working hours, which could lead some to reduce their hours. Whether the income effect or the substitution effect will dominate in aggregate will depend on circumstances. For a fuller explanation of these two effects see Rittenberg & Tregarthen.
Thus there is a key difference between the responses of capital and labour to an increase in post-tax return. There is no equivalent, for capital, of the fact that a worker only has 24 hours in a day and derives utility from the non-working part of the day. Because of this, the response of capital to a tax cut is more predictable than that of labour and (loosely again) “trickle down” may be less dependent on circumstances than “trickle up”.
‘Trickle up’ as you call it or ‘trickle down’ shouldn’t be the focus of inequality research done by economists (as this is ideologically driven rather than evidence based). The evidence does point towards excessive inequality causing worsening social outcomes. This is recognised by institutions such as the IMF and WB. Inequality research is also conducted by economists who examine structural economic inequalities. Development economists also research this question.
Quality of life measures are much more important to look at when considering how an economy is progressing. Quality of life measures should be viewed side-by-side with inequality metrics. Economic growth is only one component. It’s not the most important component. Economies that grow rapidly but only benefit a small subset of the population aren’t very effective tools for raising living standards for the most amount of people. This is a fairly utilitarian standpoint. There are some good studies about inequality that use economic measures such as the HDI versus economic inequality to determine how we should redistribute wealth and income. One of the most well-known study is titled The Spirit Level. Stiglitz and Krugman also have written extensively on these topics.