Tax cuts for corporations and high earners stimulate investment and economic growth that benefits everyone - 'trickle-down' economics.

When Ronald Reagan signed the Economic Recovery Tax Act in August 1981, it was the largest tax cut in American history. The top marginal rate fell from 70 percent to 50 percent; corporate rates dropped; capital gains taxes were cut. The argument, developed by economists Arthur Laffer and Jude Wanniski and championed by supply-side advocates, was that high taxes had strangled investment. Cut them, and productive activity would flood back into the economy. The resulting growth would generate more revenue, not less, and the benefits would cascade down to workers through job creation and higher wages.

This was the theory taught in economics classes through the 1980s and beyond, presented as the intellectual consensus behind the Reagan Revolution. Textbooks described supply-side economics in the neutral language of incentive theory: reduce the marginal cost of investment, get more investment. The political valence of the argument was often left unexamined.

The complications emerged quickly, even from within. Reagan's own budget director, David Stockman, told journalist William Greider in late 1981, in remarks he assumed were off the record, that supply-side economics was essentially a "Trojan horse" for reducing top tax rates. "It's kind of hard to sell 'trickle down,'" Stockman said, "so the supply-side formula was the only way to get a tax policy that was really 'a cut in the top rate.'" The Atlantic published the interview that December. Stockman briefly resigned but was kept on.

The decades that followed did not validate the theory's broadest claims. Economic inequality grew substantially during the Reagan years and accelerated through subsequent rounds of supply-side cuts. Real wages for lower-income workers grew slowly relative to productivity gains. The predicted revenue surge did not materialize, the deficit tripled between 1980 and 1988. A 2019 study examining fifty years of tax cuts in wealthy nations found no significant relationship between top-rate reductions and economic growth, but a strong relationship between such cuts and increased inequality.

The "trickle-down" label was always rejected by its advocates, who preferred "supply-side" or "growth economics." That terminological battle itself suggested an awareness that the distributional prediction was the weakest part of the argument.