Trickle-Down economics: A failing theory of shared prosperity

Trickle-down economics is often invoked as a common-sense policy, as a rising tide that lifts all boats. Yet this tidy narrative clashes with growing evidence that economic growth does not guarantee better living standards, especially for those left without a boat.

While inequality between countries has fallen, inequality within countries has soared. Though there’s no formal economic model by that name, trickle-down economics mirrors expansionary supply-side policy: offering tax cuts and deregulation to the wealthy and large firms, hoping gains will “trickle down” to the rest via jobs and investment.

History recap

In the UK, trickle-down policy found a strong champion in Margaret Thatcher, while in the US, it was heralded by Ronald Reagan. Thatcher’s government implemented sweeping privatisation, financial deregulation, and laws aimed at busting trade unions in a bid to improve productivity and increase growth. While the incomes of the affluent rose sharply relative to national income, Britain did not experience shared prosperity. Instead, inequality widened, household debt grew, and public services remained increasingly strained.

Former Prime Minister Liz Truss and her Chancellor, Kwasi Kwarteng, failed to revive trickle-down in 21st-century Britain through a package of unfounded tax cuts that targeted high earners and corporations. Markets did not share their vision: the pound plummeted, borrowing costs surged, and the Bank of England was forced to intervene by purchasing gilts, long-dated UK government bonds.

Contemporary relevance

In September 2024, Labour’s Chancellor of the Exchequer, Rachel Reeves, announced the “end of the trickle-down, trickle-out economics era” with policies aimed directly at working families. A national free breakfast programme was rolled out across English primary schools in April 2025, providing up to two million meals. The policy marked a significant rhetorical and practical shift away from relying on increasing wealth at the top to solve poverty at the bottom.

Despite growing criticism, trickle-down logic continues to shape policymaking, especially in the United States. It has become a defining feature of Republican economic policy, as demonstrated with Trump’s first and second terms. Currently, the “Big Beautiful Bill” includes curbing Medicare, sweeping corporate tax cuts, and rollbacks of environmental and regulatory protections under the promise of boosting the wireless industry to invest, create jobs, and propel economic growth.

A 2015 IMF report found that increasing the income share of the top 20% is linked to lower GDP growth, while gains for the middle and lower classes support stronger, more inclusive growth

However, the Congressional Budget Office paints another story, with the bill estimated to increase annual GDP by a measly 0.09%, while showering the top 0.1% of earners with a windfall of approximately $390,070 each. On the other hand, the lowest-income households will lose $820 on average because of cuts to health and nutrition programmes.

Trickle-down policies disproportionately benefit the wealthy elite, who often wield both economic and political power. These individuals frequently use their influence to lobby for policies that further entrench their advantages. Mark Bou Mansour of the Tax Justice Network argues that: “When critics say wealth taxes ‘don’t work’, what they mean is that wealth taxes are powerful enough to scare the super-rich into lobbying for loopholes. Where wealth taxes failed, it was usually by design – riddled with exemptions under pressure from super-rich interests.”

Meanwhile, the UK is projected to see a record outflow of 16,500 high-net-worth individuals in 2025, according to Henley & Partners. The firm notes that this reflects more than changes in the tax regime, with many reporting a poor perception of opportunities and stability in the UK compared to elsewhere.  

The sensible critique

No politician campaigns on a promise of lower growth or higher unemployment. The logic behind corporate tax cuts is simple: higher profits lead to more investment, job creation, and wage growth. Similarly, tax cuts for the wealthy are expected to boost spending and stimulate demand.

But the evidence tells a different story. A 2015 IMF report found that increasing the income share of the top 20% is linked to lower GDP growth, while gains for the middle and lower classes support stronger, more inclusive growth. A 2020 study by David Hope and Julian Limber, which covered 18 high-income countries over five decades, found no significant impact of tax cuts for the rich on unemployment or growth; instead, the wealthy got wealthier.

As highlighted by the IMF and other research, economies grow more inclusively when gains are concentrated among those with the highest marginal propensity to spend

This is partly explained by saving behaviour: the richest households tend to save more. The top 5% save around 40% of their income, while the bottom 20% save less than 5%. In other words, tax cuts at the top often sit idle rather than circulate through the economy.

There is no one-size-fits-all path to growth. National outcomes depend on factors like financial inclusion, access to education, and economic structure, as each shapes how income and wealth are distributed.

The way forward

Moving forward, policymakers need to avoid romanticising the fallacy of the rags-to-riches myth, which often obscures the structural barriers to upward mobility. Instead of relying on trickle-down economics, they should turn towards what is termed as ‘trickle-up’ policy; prioritising policies that directly benefit low- and middle-income groups as they contribute a larger portion of consumption spending in the economy. As highlighted by the IMF and other research, economies grow more inclusively when gains are concentrated among those with the highest marginal propensity to spend.