Trickle-Down

Released October 18, 2021

In response to the economic challenges created by the pandemic, elected officials in both parties have expressed the desire to pursue fiscal policy initiatives that will help spur private sector growth. Historically, two very different approaches have been taken to stimulate the economy by changing fiscal policy—one focuses mostly on growing private sector demand by increasing public sector spending, while the other focuses primarily on growing private sector supply by cutting taxes.

The fiscal policies taken to boost demand through enhanced spending generally involve increasing investments in core public services and infrastructure, as well as providing direct income supports to low- and middle-income families. These income supports include a number of initiatives, covering everything from enhanced unemployment compensation benefits, to targeting tax relief solely to low-and middle-income workers—precisely because those workers are likely to spend any such tax relief on purchasing consumer goods and services.

On the other hand, the use of tax cuts to boost the economy has typically involved providing either general tax relief to all individuals and corporations—which initially was referred to as “Supply-Side” economics—or targeting tax relief to primarily benefit corporations and wealthy individuals—which initially was referred to as “Trickle-Down” economics.  Interestingly, neither Supply-Side nor Trickle-Down is really an economic theory. Instead, both are concerned with how fiscal policy actions impact private sector behavior. Over time, the distinction between these two approaches has blurred, and they are now both generally referred to as “Supply-Side” economics.

Read CTBA’s most recent report to find out more about the impact of Supply-Side policies on the U.S. economy.