trickle-down theory

noun

Definition of trickle-down theory

: a theory that financial benefits given to big business will in turn pass down to smaller businesses and consumers

Examples of trickle-down theory in a Sentence

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So goes the trickle-down theory, attributed to Reagan but just as often espoused by local Democrats. — Boots Riley, HWD, "Sorry to Bother You Director Boots Riley Takes a Ride Through Oakland’s Changing Landscape," 2 July 2018

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6 Feb 2019

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The first known use of trickle-down theory was in 1954

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trickle-down theory

noun

Financial Definition of trickle-down theory

What It Is

Trickle down theory suggests that a policy of tax cuts and other financial benefits to businesses and rich individuals will indirectly benefit the broader and poor population.

How It Works

The basic principle of trickle down theory is that if top income earners have more money, they will invest their money in businesses that will produce goods at lower prices and employ more people. The principle tenet of the theory is that economic growth flows from the top to the bottom.

The basic policies promoted by trick down theory have been reductions in the corporate net income taxes, lowering of the top individual tax brackets, and reductions (and eventual elimination) of the capital gains taxes.

The debate over the basic theory has taken many forms and been called other names, such as supply side economics (in the 1980s) and the horse and sparrow theory (in the 1890s). In the 1930s during the Depression, it came known as the "trickle down theory."

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Why It Matters

Trickle down theory is heavily debated among economists and politicians. However, there is little empirical evidence that proves that it works. Periods of growth and decline are not highly correlated to changes in tax rates for the wealthy. Rather, these periods correspond to disruptive technologies, market growth, changes in variable business costs (e.g. oil and labor), and general business cycles.

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