Tuesday, February 27, 2024

The pros and cons of the trickle down theory

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trickle down theory

The main aim of economics is to determine what is production and how to increase production. At the same time, the benefits of the achieved development should be distributed among the people of all strata of the society on the basis of fairness. Modern economists think that the state can never be a good trader or producer. The main role of the state will be to facilitate the development of the private sector by building physical infrastructure. Because if the state takes on the role of producer then corruption will prevail, which is completely contrary to the idea of a welfare state. Along with facilitating the path of development of the state and private sector, the benefits of the achieved development are distributed on the basis of fairness at all levels of the society. But the state cannot distribute the benefits of development on a fair basis at all levels of the society, if the entrepreneurs of the private sector do not show goodwill. It is universally accepted that if the benefits of development are concentrated in the hands of a special class at the upper echelons of the society, it can never be called true and balanced development. Not sustainable development. If the achieved development is not distributed on the basis of fairness in the society, class discrimination increases in the society and at one time various types of chaos are created. So every government tries to achieve maximum development as well as how the benefits of the achieved development can reach the lowest level of the society. If the benefits of development can be delivered to all levels of society on the basis of fairness, it is possible to change and accelerate the quality of life of people. Economists have done a lot of research on how to do this difficult task. New theories have been invented. One such theory is the trickle down economy.

The inventors and followers of the trickle down theory believe that if the state or regulatory agency provides various policy supports to the wealthy individuals or groups at the upper level of the society, such as tax exemptions, tax holiday facilities, marketing assistance, then they can expand their business and production activities. can New units of production can be started. As the country’s economy will be dynamic and prosperous, it will also create great employment opportunities for the people living in lower levels. It will benefit the people living in the lower strata of the society. This theory is a brilliant strategy of capitalist economics to extend state support and privileges to a select few. In many cases this support of the state towards particular groups may seem unethical and discriminatory. But the state often provides such support in the hope of rapid economic development. Now the question is, why will the state give this opportunity to a handful of rich people living at the highest level of society? Ordinary poor people can be brought to the higher level of society with such support. The problem here is that helping poor people who live at the bottom of society, financially or otherwise, may not make them wealthy. Because experience matters here. Supporters of this theory think that the government should give overall support to the wealthy class of the society. Then they can contribute to the development of the country. It will benefit all the society in the long run. This theory belongs to supply side economics. Its proponents believe that policy support, including tax cuts, will enable large companies to expand and invest at higher rates. They can set up new factories and modernize and expand old factories. Ability to use new technologies. Wealthy class can spend more. A large number of products and services are available in the market. When enough money circulates in the hands of consumers, they can buy more goods. As a result dynamism will be created in the economy. This theory was first pursued in the United States in 1921.

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According to classical economists, the supply of a product itself creates its demand. That is, when a product appears in the market, consumers become interested in purchasing that product. But this assumption is not always true. Because whether a consumer buys a product or not depends a lot on his purchasing power. People with limited purchasing power cannot buy various products from the market whenever they want. It is said that when the supply of goods and services increases, economic growth is achieved at a high level. But this idea is not correct at all. If there is excess supply of a product in the market then the price of that product will fall. Producers may suffer financially.

The trickle down theory did not work properly in the US itself. President Hoover of the United States applied this theory to his country around 1930. At that time it was thought that the people would benefit by incentivizing business prosperity. But practically opposite results have been observed. It has been shown that, while tax cuts and other policy supports increase corporate profits, they always increase employment, investment, productivity, and economic growth. This theory was of no use in preventing the severe economic recession that occurred worldwide. At that time the theory of demand side economics was strengthened. During the time of US President Donald Reagan, it was observed that tax cuts did not increase employment in the country. Supply side policies have weakened investment. According to this theory, the non-supply-side policy of the 1990s has increased investment in the United States in comparison to the Reagan and Bush eras.

If discussed in the context of Bangladesh, it will be seen that we are following the trickle down effect theory whether knowingly or unknowingly. A special class at the higher level of the society is being given various kinds of policy assistance by the state. Arrangements have been made to obtain bank loans at relatively low interest with tax holiday and tax reduction benefits. Even those who take loans from banks and divert them to other sectors without using them for their intended purpose or smuggle them abroad do not have to face severe punishment. If the factory is closed due to default, a large number of workers will be unemployed – no defaulter factory is being closed. Those who pay regular bank loan installments are not given any financial benefits. But for those willing to withhold loan installments, various types of financial assistance are generously provided. Corporate tax is being reduced along with providing financial assistance in export of goods, providing financial assistance by forming export fund. Instead of punishing money launderers abroad, they were allowed to bring the money back into the country subject to paying a small tax. But no one brought the money smuggled abroad back to the country. Existing factories in the country are not being expanded due to the fact that the facilities provided by the state to entrepreneurs of large companies are not properly utilized. Rather, some entrepreneurs are smuggling their earned wealth abroad with various facilities from the state. Not only that, income inequality in the country is increasing rapidly.

Those involved in money laundering and money laundering never disclose their source of income and amount of money to anyone. Therefore, no statistics related to this are final. But there is no doubt that the amount of money smuggled is huge. If this money was used in the country instead of being smuggled, then the benefits of the trickle down effect might have been obtained to some extent. At present, the visible amount of defaulted loans in the country’s banking sector is 1 lakh 25 thousand crores. But if the actual calculation is published, it will exceed 3 lakh crores. According to a CPD study, the country is losing revenue equivalent to Tk 41 thousand crore to Tk 2 lakh 23 thousand crore every year due to tax evasion. A country’s tax-GDP ratio should be at least 15 percent. But in Bangladesh this rate is only 7.9 percent.

Good governance must be established at all levels to overcome this situation. Transparency and accountability must be ensured. Effective preventive measures against corruption should be developed. Social safety net should be strengthened and corruption free. Business ethics of businessmen and industrialists should be increased. The most important thing is to ensure balanced use of the resources that will be acquired within the country or from outside the country.

Author: Retired Banker, Economic Analyst

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