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The term trickle-down economics often come up in debates, even on this very site there are questions about situations where it did or did not work, but what does that term actually mean?

I tried to search for it, but all I got was heated debates about it with proponents and critics insulting each other, and lots of memes, but not any understandable definition. Even the more encyclopedic sites were vague, or just linked to Ronald Reagan without any explanation how such a system is supposed to work.

So, my question is, how is a system based on "trickle-down economics" supposed to work?

Please note, that the question is about how it is supposed to work. Not whether it will work or not, or whether it's a good idea or not, or whether people proposing it are good or evil. For example, we can easily find descriptions about how communism is supposed to work, even though in real life it newer works out like that (the dictatorship of the proletariat is supposed do redistribute the wealth they confiscated from the owners of capital, for everyone's benefit, and then wither away, but it somehow never happens. But we get at least told what is supposed to happen if everything works out).

So, how would a system based on trickle-down economics work in the ideal case?

In my naive understanding of the words themselves, it seems about the idea that it is not a bad thing if there are rich people, because their wealth trickles down. If rich people buy luxury yachts, then it provides jobs for those who build them, maintain them, and crew them, jobs they wouldn't have had if the rich weren't buying those luxury yachts. Or if a corporation gets stronger, it will hire more people. Or if rich people get richer, it's not a problem because they will then use that money to build things which then benefits the population, or they build factories which create jobs, etc. But that is only my naive interpretation, and surely people have thought of this before Ronald Reagan, even thousands of years before him.

So if it's not how I understood it, then what is it?

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    $\begingroup$ I'm a lay person, but from the answers, it appears this term is not really used in economic literature, but rather in political debate. Should this question be on Politics? $\endgroup$
    – gerrit
    Apr 3 at 11:09
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    $\begingroup$ If you want to find the non-judgemental explanation, look for "supply-side economics". $\endgroup$
    – Barmar
    Apr 3 at 15:34
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    $\begingroup$ I am voting to close this question as needing details and clarity. It is abundantly clear that trickle down economics does not have consistent definition. It can be Regan's policy, supply side policy, loose monetary policy, policy of decreasing taxes but only in some unspecified cases and in other cases lowering taxes does not count. Without further details and clarity its impossible to say workings of what system you want to describe. Description of loose monetary policy is different than low corporate tax rates. Also these are polices not systems. $\endgroup$
    – WilliamT
    Apr 4 at 2:07
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    $\begingroup$ Moreover, technically there is infinitum of potential supply side policies, so asking to describe supply side policies would be too broad. Question on just tax policy would be too broad, are we talking about income taxes, wealth taxes, value added taxes, sales taxes, inheritance taxes? I recommend picking some specific policy you find interesting, someone calls trickle down and ask about that specific policy, without this controversial term. $\endgroup$
    – WilliamT
    Apr 4 at 2:31
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    $\begingroup$ What is trickle-down economics? One word: Fiction. $\endgroup$ Apr 4 at 8:57

4 Answers 4

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What is "trickle-down economics"?

Trickle down economics is a pejorative or at best political slogan. There is no economic theory called trickle down economics. It is similar to political slogans like “wokenomics” or “soak the rich”, which, do not originate in economics and are used primarily by politicians/pundits, but do not actually refer to a formal pre-existing economic theory/system/idea1.

Usually the “trickle down economics” pejorative is used as an insult to the economic policies of Ronald Reagan of reducing taxes (but they are not used for tax reductions by other politicians such as Kennedy)2. Sometimes it’s used also as a pejorative for supply side policies in general (see encyclopedia). However, its usage is not consistent.

The term trickle down economics was coined by Will Rogers (see here) who was a humorist, journalist and radio personality with no economic background. It was not a term that would be used in economic discipline to describe some concrete economic theory or economic idea.

So, how would a system based on trickle-down economics work in the ideal case?

This is not really possible to answer because of the above. However, maybe some context can clear it up.

First, it’s agreed by virtually all serious economists that economy is endogenous system. In every economics textbook you will find a diagram of circular flow which shows that all money circulates in the economy. Spending of a rich person on a luxury yacht does improve welfare of workers employed by yacht industry. I think that virtually every economist would agree with that (however, that does not mean some would not argue it would be even better for the workers to be unemployed with generous welfare payments or working other jobs).

Moreover, again virtually all economists would agree that when aggregate supply (aggregate production of goods and services in an economy) expands, incomes of masses increase. This is something that is non-controversial and can be found in any textbook (e.g. you can read Mankiw Principles of Economics, or Krugman’s Economics or any other author).

However, the real question is whether pursuing these supply side policies is overall better for society than pursuing other policies, like for example having generous welfare policies (which require high taxes, which in turn may lead to slower growth of aggregate supply) and so on. Furthermore, giving a dollar to the poor also leads to circulation of that dollar in the economy. Difference, is that poor people have higher marginal propensity to consume which means that more of it will go to consumption spending, but then rich have higher marginal propensity to invest. Discussing relative benefits of each would be too broad for an SE answer, but point is it’s not universally agreed which is better for an economy at a particular time.

This is not just economic but also political and moral question. Ultimately correct answer depends not just on positive (i.e. objective) characteristics of economic system, but also on people’s political and moral considerations.

Unfortunately, people, politicians and regrettably even scientists are not always able to discuss these matters in a civil manner. Hence, this is where the terms like trickle down economics or soak the rich come from. Since these terms are insults it’s impossible to really define them in rigorous scientific manner or say how they are supposed to work.


1. This should not be confused with real economic terms like free markets or socialism that are sometimes used as pejoratives but have actual pre-existing economic definitions, theories and literature behind them and originated in academia.

2. Similarly the slogan “soak the rich” is in US applied to tax hikes made by Democrat politicians but not to Republican politicians like Bush. These are in essence empty labels that mean “bad policy of the other guy”.

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  • $\begingroup$ Comments have been moved to chat; please do not continue the discussion here. Before posting a comment below this one, please review the purposes of comments. Comments that do not request clarification or suggest improvements usually belong as an answer, on Economics Meta, or in Economics Chat. Comments continuing discussion may be removed. $\endgroup$
    – 1muflon1
    Apr 3 at 22:58
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The basic idea behind 'trickle-down economics' is that if an action, like a policy change, will increase overall wealth then it should be seen as a net positive regardless of how this will affect the wealth distribution among the population. That is because, in the long run, it will 'trickle down' - which is to say increase everyone's (or at least most people's) wealth.

This is essentially the idea of supply-side economics which is a serious economic concept, whereas trickle-down economics is a derogatory name for it used by its critics. (Note the Wikipedia argument about the terms: SSE starts with 'not to be confused with TDE'; TDE starts with 'it is a critical term for SSE')

This greatly simplifies judging various proposed policy changes because it gives you a direct quantifiable score and it is also something that is directly computable in lots of theoretical models of the economy.

Increasing wealth is seen as a positive thing by essentially everyone; the question is more about increasing wealth at any cost.

The main counter-arguments are that the long run could be very long indeed and, more importantly, that the overall most wealthy society is not the most desirable one. This can be easily seen by considering extreme examples but in practice this leads to complicated value judgements about how many poorer people you are willing to accept if the overall wealth increases.

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  • $\begingroup$ Comments have been moved to chat; please do not continue the discussion here. Before posting a comment below this one, please review the purposes of comments. Comments that do not request clarification or suggest improvements usually belong as an answer, on Economics Meta, or in Economics Chat. Comments continuing discussion may be removed. $\endgroup$
    – 1muflon1
    Apr 4 at 9:01
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I think the top answer is good but unnecessarily long and harder to absorb. A better answer was given in the comments below:

Trickle down economics is basically any system that people on the left don’t like...

I would just modify it a little a bit, since more correct definition would be;

Trickle-down-economics is any system that people on the left don’t like, and which they perceive to disproportionately benefit the rich.

I have seen the term trickle-down-economics used widely inconsistently, even for environmental economic policies which some people on left perceive as benefiting the rich more (e.g. cap and trade). For example, this article calls the US pandemic policy, which was clearly demand-side policy trickle-down-economics.

Notice, the policy does not need to even actually disproportionally benefit the rich, it is just important that it is perceived as such. As was correctly mentioned in the comments under the top answer, people call Regan's tax cuts trickle-down-economics, but not the tax cuts that Kennedy did. What is trickle-down-economics is in the eye of beholder. The same tax cut can be trickle-down-economics if it is done by republicans, but not if done by democrats. Consequently, there isn't a way how to describe how such "system" works.

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    $\begingroup$ How is this so highly voted? OP asked specifically about the ideas/justifications, not the rhetorical use. This is like saying "socialism is any system that people on the right don't like, and which they perceive as undeservedly benefiting the poor". $\endgroup$
    – w123
    Apr 3 at 12:08
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    $\begingroup$ @w123 because there are no ideas in economics that are called trickle down. How do you describe ideas that do not exist? As the other answer pointed out, this is the same as trying to ask what are the ideas of soak the rich, or wokenomics. Socialism is actual economic system that was developed by economists. There is no economist that developed some system called trickle down economics. For example, Bidenomics is also meaningless term and if the question would be about it I would answer similarly. There is huge difference between real terms like socialism, market economy etc that are $\endgroup$ Apr 3 at 12:54
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    $\begingroup$ legitimate economic terms, but sometimes get appropriated by political ideologues as insult and terms that are just insults without any substance. $\endgroup$ Apr 3 at 12:58
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    $\begingroup$ This isn't even very useful as an insult. The accepted answer pointing out that its used as a blanket term against supply-side economics is a far more accurate (and useful!) critique. There are loads of things left-leaning economists strongly dislike that they don't call "trickle down". $\endgroup$
    – T.E.D.
    Apr 3 at 14:11
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    $\begingroup$ Leeh, your comment in answer to @w123 would actually be a better answer than your full answer post, which is not defining anything but merely stating subjective (and indeed exagerated) opinions. At least in the comment you are talking more impartialy, : "There is no accepted definition...". $\endgroup$
    – Hoki
    Apr 4 at 14:03
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I think this Wharton School of Business article answers your question. Here is a summary of what the article says since link only answers are not allowed.

You first ask: What is "trickle-down economics"?

  1. The term ‘trickle-down economics’ doesn’t really represent a cohesive economic theory

  2. It’s a term used, often negatively, to characterize the view that reducing taxes on the rich will benefit the non-rich.

This is the point of the answer by muflon and Leeh. I think if you want to be very pedantic you can make claim that since it is not coherent theory it can't be described in economic terms because there is nothing to describe. However, we can pick one particular usage, just for the sake of giving you some answer. We can for example pick the policy of "lowering taxes" as being trickle down economics (because the article does so) and then we could describe it. You should still keep in mind that this is merely one of various different usages of the term trickle down economics, the term is like the sheep inside the box from the Little Prince.

Next you ask: how is a system based on "trickle-down economics" supposed to work?

If we use trickle down economics as label for reducing taxes, then we are not talking about economic system but a particular policy inside wider economic system. The article explains how this works:

There are a number of reasons why tax cuts for high earners could theoretically make others better off, he says. “Economists have long emphasized that taxes don’t necessarily ‘stick’ where you levy them — for example, a tax cut on corporate profits could raise workers’ wages. And if taxes are very high, reducing them can theoretically spur economic activity enough that tax revenues actually increase, which may have been the case in the 1950s, when top income tax rates exceeded 90%.”

Lower taxes will probably add to growth. “Almost all economists accept that,” ... “How much and for how long is another question, and that’s where we disagree. There are several reasons for that. Some of us will say it is because lower taxes encourage people to work more and maybe corporations to invest more. If the tax cuts are long lived, this will raise national income for a long time.

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    $\begingroup$ Note that your quote does not say "lowering taxes" in general, but specifically lowering taxes on the "rich", which could mean those in the highest tax bracket or something like lowering the capital gains tax. $\endgroup$
    – Giskard
    Apr 4 at 6:26
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    $\begingroup$ @Giskard in that particular paragraph yes, but the article further talks about corporate taxes, about the term being used for Trump tax cuts which did also applied to middle class and other general taxes. I see that when copy-pasted out of context it looks like I am broadening it but that is already done by that article. I attribute this to the term being inconsistent, even to that degree Wharton article cannot simply properly define it or stick to some narrow definition. $\endgroup$ Apr 4 at 9:24
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    $\begingroup$ @gerrit What you are saying does not make sense to me. Lowering top-brackets should increase high-income jobs not destroy them because now it is cheaper for corporations to hire those people. For example, if high earners pay 90% tax on income, when corporation pays them 1 million they receive 100k. If the CEO is willing to stay at job at 100K net, without tax the corporation could hire 10 CEOs instead of one. Opposite of minimum wage would be maximum wage, and maximum wage would destroy supply for top jobs, but these taxes are not equivalent of minimum wage for top, I can't see any connection $\endgroup$ Apr 4 at 9:31
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    $\begingroup$ @LorenzoPozzi you are writing as if "corporation" is some separate rational being, not controlled by the same CEOs and other top brass that would happily increase their compensation x10 instead of hiring 10 CEOs (after all, there is generally no need for more). $\endgroup$
    – Dan M.
    Apr 4 at 14:19
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    $\begingroup$ @DanM. that is very reductionist. Corporation is a broad term. In many countries what you said would not be legally possible since shareholders usually have to approve any compensation package for CEO and board of directors. Besides, even if there are some corporate governance issues that does not mean there isn't a difference between minimum wage and taxes. They are completely unrelated. $\endgroup$ Apr 5 at 11:16

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