When tax rates are reduced, investment in productive enterprise is encouraged. When productive enterprise receives investment capital, the workers must be hired to produce output to yield a return on that investment. When value is created through this labor in a new enterprise, our economy expands and new wealth is created. When new wealth is created taxes are paid on income that didn't previously exist.
As a result of lower tax rates and more productive investment, there are more jobs and less unemployment. Less unemployment means more income (that didn't previously exist) which taxes are extracted from. If the venture succeeds and new wealth is created for the investors, again, more taxes are paid on gains that didn't previously exist.
It is also mentioned in Trickle Down Theory and Tax Cuts for the Rich that if the purpose of a national income tax is to increase revenues, the history proves to us (there are numerous examples cited in the book spaning a numer of different administrations and periods) that reducing tax rates does in fact increase revenue.
Conversely, the notion of raising income tax rates on the most wealthy seems to signal that the main purpose of our tax code is not the raising of revenue, but rather the redistribution of what is believed to be a fixed amount of wealth.
The opportunity cost of this is tremendous. Instead of investing in big, risky things that will push our economy (and society) to new heights, we end up with increased foreign investment or increase in cheap money for states and municipalities.
With this ever increasingly cheap and easy source of funds to state and local governments, it can cause a poor appropriation of these funds into bad projects and wasteful spending.
Thomas Sowell argues in Trickle Down Theory and Tax Cuts for the Rich that the combination of high tax rates along with tax-sheltered investments like state and municipal bonds that dollars that would otherwise go towards investments that would grow the economy, end up going to state and local governments.
With that in mind, I feel we should be focused on growth rather than distribution.
I feel the opposite is true and quite self-evident.
History shows us that wealth is something that expands (as well as contracts) at a societal level. Just look at the world today compared to the Dark Ages. Look at the United States now as compared to the 1800s, even just 100 years ago.
Wealth is clearly something that is elastic.
If you hold that there is a fixed amount of wealth in society, then by definition if someone gains additional wealth then someone must have lost some wealth.
I think part of this stems from the core philosophical position that there is a fix amount of wealth and therefore we most focus on the equitable distribution of it.
The purpose of cutting tax rates is not that this extra money will somehow magically fall through the economic down to people who have less, which is where the term "trickle down" comes from.
Rather, the purpose of cutting tax rates, at least one purpose, is to increase revenue. This increased revenue comes from the expansion of the economy and history has proven that when this happens the top earners end up paying even more tax than before.
This whole notion of "trickle down economics" is problematic.