Free The Gardens of Democracy: A New American Story of Citizenship, the Economy, and the Role of Government by Eric Liu, Nick Hanauer Page B

way down from wealthy capitalists to everyday Americans.
    That’s the theory. Politically it has been a great success. The rhetoric of shrinking government and not punishing “job-creators” is dominant in American public life. The policies that support the rhetoric—personal income tax cuts for the wealthiest, cuts in capital gains taxes, cuts in the corporate income tax, rollbacks of the estate tax—have been left unchanged, plus or minus, by presidents of both parties since Reagan. The theory begat a political and policy consensus that even the Great Recession has barely nudged.
    Unfortunately, there is one way trickle-down economic theory has failed: empirically. Average household income looks like it’s 50 percent higher today than when Reagan took office—but that average is deceptive. Most of the gains in income during these three decades have gone straight to the top, particularly the top 1 percent. And the modest income gains of the middle between 2010 and 1980 look even less impressive when we consider that the average household now has more people working many more hours just to keep up. In practice, this has meant wage stagnation for the middle class, who’ve taken on ever more debt to keep up with the Joneses.
    In their groundbreaking book on the policy choices behind inequality, Winner-Take-All Politics , Jacob Hacker and Paul Pierson meticulously explore the real dollar impact of rising inequality. One example sticks out: If the income distribution for all Americans had remained constant since 1980, the average American family would be earning $64,395, which is $12,295 and 24 percent more than they do today. If Americans had this much more to spend, and the nation this much more in its tax base, the economy would not be struggling as much as it is in 2011.
    To understand why the low-wage, high-consumption, high-debt implementation of trickle-down economics has been such a failure—for everyone but the top 1 percent, that is—it’s necessary to examine one of its core intellectual foundations: the notion that redistribution of wealth is inherently illegitimate and ineffective.

Redistribution, Spending, and Recirculation
     
    This claim is sometimes offered up in cartoonish accusations of socialism. But in its more serious form, it is that redistribution kills the profit motive, is less efficient than market forces, and thus works to decrease overall wealth. By contrast, goes the claim, incentivizing those with capital to accumulate even more—even if it results in great and inherited inequality—is more consistent with American principles of liberty and free enterprise.
    Let’s take each piece of the claim in turn. To begin with, increases in income tax rates generally do not make already wealthy capitalists less likely to pursue profit or to engage in job-creating economic activity, whether starting a business or buying a car. It is absurd to claim that hedge fund managers would work less hard if the taxes they currently pay on carried interest were to increase from 15 percent to 50. In fact, a persuasive case could be made that a person who kept only 50 percent of his billion dollars in annual income, rather than 85 percent, would work close to 33 percent harder. Yes, there is a point of diminishing returns past which workers keep too little of the value their work creates, their incentive to work hard diminishes, and overall growth slows. We are nowhere near that. After the tax increases under the first President Bush and President Clinton, income tax rates were much higher than today—and yet this country enjoyed in the 1990s an unprecedented economic expansion and period of job creation. (And while we don’t advocate the 90 percent marginal rate of the 1960s, we would note that America’s growth rates were never higher than during that period of supposedly job-killing high taxes).
    Next, the trickle-down economics crowd posits a false choice between government-mandated redistribution on the