Trickle Down Theory

Trickle Down Theory

An informal term for a macroeconomic theory that a government can best promote growth by providing incentives for persons to produce goods and services. The primary way a government does this is by maintaining low tax rates so that investors and entrepreneurs may invest their money in production. Maintaining low tax rates on the wealthy is one of the most important and controversial aspects of trickle down theory; the theory states that if well off persons have the capital available to produce goods and services, they create jobs and thereby grow the economy. In other words, the growth "trickles down" from the wealthy to the remainder of the economy. Critics contend that this does not happen in reality and that the wealthy are more likely to keep, rather than invest, their money. In the United States, trickle down theory was crucial to the economic policy of the Ronald Reagan administration. See also: Keynesian economics, Monetarism, Thatcherism.