Introduction
The past half century has been a period of substantial change in tax policy in the advanced democracies. A particularly prominent part of this transformation has been the dramatic tax cuts on the rich across the Organization for Economic Co-operation and Development (OECD) countries.
Recently, the newly elected government in United Kingdom (UK) unveiled a multi-billion-pound package to support its households and businesses hit by the highest inflation in decades, cutting taxes as the nation heads for recession. Policies like cutting the lowest rate of income tax and reducing the highest to 40 per cent from prevailing 45 per cent, thereby reversing a planned increase in tax rates on company profits, plans to scrap taxes on salary income, lifting the point at which tax is levied on purchases of residential/immovable properties, as soaring interest rates put the brakes on the housing market, etc. and confidently proceeding to follow the “Trickle-Down Economics” thereby sensing the win-win situation amid recession. Now, the influential policy that such tax cuts for the rich would actually ‘trickle down’ to boost wider economic performances targeted at the top decile of the income distribution have to be seen after a considerable period of time.
Scope of this article
In line with the above background, the author through this write-up has precisely tried to encompass the practical aspects relating to “Trickle-Down Economics Theory” followed by major tax cuts amid recession and its implications on Indian Economy.
The History of Trickle-Down Economics
Before century getting into the nitty-gritty, let us try to understand the history behind the “Trickle-Down Theory”. In its earliest forms, trickle-down economics dates back to the 18th. The theory was popularized in the early 20th century by future president Ronald Reagan, who used it to persuade Congress to slash taxes across the board, including those on corporations and the wealthy. A few decades later, as the Great Depression raged, President Franklin Delano Roosevelt offered a different antidote to economic malaise. The New Deal, as it was called, involved an enormous government spending effort that promoted job creation and economic security. In the decades since, these two theories have been pitched against each other in a debate that has never been decisively resolved.
Trickle-down economics: Does it actually work?
The answer to this question is not a simple yes or no. Theoretically, it does make sense that cutting taxes for the wealthy could generate more growth. If the rich have more money to invest, they might create new businesses or expand existing ones that would hire more workers. But in practice, tax cuts for the rich are not as effective as they sound. For one thing, it is not clear that the rich actually create jobs when they have more money. In fact, many studies have found that high-income people tend to save more of their money when tax rates are lower. That means they end up accumulating more money instead of reinvesting it in their businesses or the economy as a whole. Moreover, while many middle- and lower-income people would benefit from more government spending, wealthy people are more likely to put any extra money they get in the bank.
Trickle-down economics in India
There are two key points to consider when examining the effects of trickle-down economics in India―the Indian economy and the Indian political system. The Indian economy is growing and has the potential to grow even more with the right policy decisions, so it is a promising environment for economic growth, regardless of the political system.
The Indian political system, on the other hand, is heavily influenced by the idea of “majoritarianism.” Essentially, majoritarianism preaches that the majority rule and minorities should adjust to the majority, even if the majority is acting against the interests of the nation. This can be seen in the way the current ruling party promotes the idea of “economic growth at any cost.” With Prime Minister Narendra Modi at the helm of the ruling party and his promise of “acche din” (good days), the Indian economy has been growing steadily. However, it has been argued that the growth has been a product of the ruling party’s policies that are based more on “majoritarianism” than a desire to promote economic growth.
Conclusion
Trickle-down economics has been a part of public policy debates in the U.S. ever since President Reagan used the theory to push for tax cuts. In 2018, it continues to influence public policy debates because it remains a theory that has never been decisively resolved.
While the idea behind trickle-down economics makes sense, in practice, tax cuts for the rich are not as effective as they sound. The rich are more likely to save more of their extra money instead of investing it in ventures that stimulate growth, which in turn creates new jobs for the working class.
The Indian economy is growing and has the potential to grow even more with the right policy decisions, so it is a promising environment for economic growth, regardless of the political system.
The author can be reached at advashishparashar@gmail.com
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