Trickle-down Economics in the Global Economy

Trickle-down Economics Theory argues that government efforts to increase the earnings of those at the very top of the economic ladder are the most efficient way to stimulate the domestic economy. This theory is based on the premise that this segment of the society has the greatest capacity to influence the level of economic activity. While the wealthiest individuals and organizations have a disproportionately high potential to impact domestic economic activity, this potential can be undermined by the fact that in a global capitalist economy they also have more options as to where to exercise their financial resources.

In general capitalism encourages entities to exercise their financial resources where doing so provides them with the greatest return on their investment. In a global economy this may not always be in their country of residence. As such, where there are financial incentives for the wealthiest to invest their resources overseas, a domestic application of the Trickle-down Economics provides the source for a pump that transfers revenues from the domestic government (ultimately the taxpayer) to foreign markets.

Through increasing globalization there are an increasing number of incentives for entities to exercise a portion of their financial resources overseas. The emergence of these overseas financial opportunities decreases a nation’s potential gains from concentrating potential tax revenues in the hands those at the very top of the economic ladder, since they are in the best position to take advantage of such opportunities.

By contrast, low and middle income individuals and organizations, which typically are disproportionately less able to influence domestic economic activity, are also less likely to have the means to exploit overseas financial opportunities. As a result, tax breaks and other government incentives provided to this segment of the population are more likely to remain in the domestic economy.

At some point, the decreasing probability that the wealthiest will chose to fully exercise their greater gross capacity to influence the domestic economy will reduce their net capacity to do so to a level below that of low and middle income entities. In other words, while those at the very top of the economic ladder will continue to have a greater gross capacity to impact the domestic economy, financial incentives to invest some of their resources overseas can decrease their net domestic influence on the economy to a point where it is less than that of low and middle income financial entities.

While it is arguable whether or not the elbow in this curve has already manifested current economic trends are undeniably moving in that direction. This means that government tax policies of developed nations should be adapting to this eventuality. The key to developing such policies is to acknowledge the obsolescence of the simple Trickle-down Economics Theory.

Increasing globalization is leading to the emergence of a point of diminishing returns in terms of tax incentives for the wealthiest. Once this threshold emerges, continuing globalization will move it down the economic ladder as more easily exploited overseas financial opportunities manifest. Unconditionally directing potential tax revenues towards those above such a threshold would represent a less efficient means of stimulating the domestic economy than directing those revenues towards entities at the top of the range immediately below this point. The alternative would be to apply appropriate conditions to government incentives directed towards those at the very top of the economic ladder.

The appearance of this point of diminishing returns in a national economy is an indicator that financial entities above it represent international enterprises that have economically transcended national boundaries. The simplistic theory of Tickle-down Economics is dangerously obsolete for all such entities. Governments who refuse to acknowledge this conclusion do so at their own financial peril.