In 2013, North Carolina’s legislative session centered on the issue of reforming the current tax code. House and Senate Republicans had no disagreements about eliminating corporate income tax, lowering income tax and estate tax. But Sen. Bob Rucho (R-Mecklenburg) and Speaker of the House Rep. Thom Tillis (R-Mecklenburg) were battling about the proposal of which tax should be expanded to offset the lost revenue. Expanding the base of sales tax was among the most popular options to consider. At the same time, they managed to cut public school funding, shifting more burden to households.
Critics regard the Republican policy as a philosophy based on trickle-down economics. Put simply, believers of trickle-down economics claim that tax cuts and deregulation for the wealthy and industries would spur high degrees of economic prosperity for the whole society, in a way that the entrepreneurs could have greater incentive to invest and employ, thus triggering greater economic growth. Trickle-down economics has somehow been misunderstood by both sides of the political arena.
At the end of last year, Pope Francis issued a progressive statement about economic equality, surprising many.
“Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world,” Pope Francis said.
“This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.”
The pope was right when it comes to revealing the dark side of human nature that few ruling elites are willing to give up their power to help the weak and poor. But history shows that unfettered capitalism has been a great force driving economic growth, and thus led to a society with a higher moral conscience. Moreover, trickle-down economics has never been a theory.
As Greg Mankiw, chairman of the economics department at Harvard University, points out, it is a “pejorative used by those on the left to describe a viewpoint they oppose. It is equivalent to those on the right referring to the ‘soak-the-rich’ theories of the left. ”
The question whether or not the experiment of the trickle-down economic system boils down to whether tax cuts would create economic growth to a large extent. Throughout economic literature, there is little consistency in correlation only between tax rate and growth. Michael Walden, a professor of economics at N.C. State, told Story of America that empirical data indicate levels of tax rates could result in divergent consequences of different economic growth paths across regions and countries. Economists never reach a general conclusion of tax rate on economic growth which in fact depends on not only tax rate, but also factors like population, technology and education.
But Walden suggested that a broader base of taxes with lower rates on each item and a very simple structure would be a healthier tax system in North Carolina. A lower rate on income but higher rate on broader sales is most likely to hit low-income families hard because low-income families tend to spend a large proportion of their income on survival consumption such as groceries and clothing. A tax rebate to low-income households can be used as a remedy. Traditionally, North Carolina’s economy had relied on the agriculture industry, particularly tobacco. But with the booming of Research Triangle Park, recent empirical research has shown that the state’s economy has shifted to relying more on investment on education, especially higher education. In this sense, education plays a more effective role than tax cuts to boost the economy.
A sustainable economic growth path cannot be forged in a way that trickle-down economics works, only in favor of the wealthy and entrepreneurs, nor the way that Pope Francis and other anti-capitalists desire, distributing income more evenly.
