Axiom CPA, P.A. - Axiom CPA Blog

This election season one of the arguments back and forth is between Obama's desire to cut taxes on the lowest wage earners and McCain's desire to cut taxes for businesses. I realize that I'm over simplifying but work with me a little.

The thinking behind trickle-down economics is that if businesses pay less tax they will invest those dollars back into the business, create jobs, higher profits and ultimately higher taxes for the Treasury.

The opposite approach says cut taxes for those purchasing goods so that they'll buy more, thereby generating more profits for businesses, create jobs, higher profits and ultimately higher taxes for the Treasury. We'll call this trickle up.

Trickle down makes sense because it generates additional revenue for businesses through reduced taxes FIRST. Businesses now have a choice of what to do with that money. Political arguments over whether trickle-down makes sense revolve around whether or not businesses actually DO make the choice to reinvest that extra cash or whether the owners pocket it. I believe they do invest it simply because businesses are in business to generate profits. Capital can only generate a profit if it is put to use.

For me, a business owner, this is just common sense and I have a hard time understanding why people don't "get it." Suppose my business generates a 25% return on investment and I find myself with $10,000 extra dollars through tax savings. If I invest that money back into the business it will grow to over $24,000 in just four years.

Trickle up is a harder sell. First, it requires that people spend the extra money rather than save it or payoff debt. In other words trickle up depends upon people acting irresponsibly while trickle down depends on businesses acting in their own best interest. Second, trickle up presupposes that businesses will take the leap of faith to invest in extra capacity needed to handle the new influx of revenues BEFORE those revenues show up. This kind of speculative behavior is uncharacteristic of smart business owners so what generally happens is revenues pour into businesses ill equipped to efficiently turn those revenues into profits. Finally, businesses have little incentive to either invest in excess capacity or generate excess profits in light of an unfavorable tax climate that effectively limits reinvestment of after-tax profits.

When you think about it our entire economy works on a trickle down basis. Businesses don't give money away and hope customers use that money to buy their products. Businesses invest money in resources such as labor and materials to add value that customers want to purchase. Business presume that their customers have likewise traded resources for cash so that they have money to spend.

In my opinion trickle down policies work economically while trickle up policies work politically. Each has it's place and we would do well not to confuse the aim of Obama's "spread the wealth" policies. It's about votes, not the economy.