The trickle-up effect or fountain effect is an economic theory used to describe the overall ability of middle class people to drive and support the economy. The theory was founded by John Maynard Keynes (1883–1946). It is sometimes referred as Keynesian economics in which economic growth is enhanced when the government lowers taxes on the middle class and increases government spending.
Relationship to the trickle-down effect
Traditional supply-side economics suggests that when business is less hampered by government controls or high taxation, it produces more economic benefits for the middle class in the form of jobs and cheaper goods. "Trickle-down economics" is a pejorative term for a policy of cutting taxes on wealthy in an attempt to stimulate overall economic activity. The extent to which any government has ever made "trickle-down" official policy is controversial. Under president Reagan, the US lowered the maximum tax rate, which affected the highest income earners, from 70% to 28%. Between 2001 and 2003, the Bush administration lowered the top marginal tax rate from 39.6% to 35%.
The trickle-up effect states that policies that benefit the middle class directly will boost the productivity of society as a whole, and thus those benefits will "trickle up" to the wealthy. On February 17, 2009, Obama signed into law the American Recovery and Reinvestment Act, a $787 billion economic stimulus package aimed at helping the economy recover from the deepening worldwide recession. The act included increased federal spending for health care, infrastructure, education, various tax breaks and incentives, and direct assistance to individuals. Democrats overwhelmingly supported this measure, while only a few Senate Republicans supported the law.
The CBO estimated ARRA would positively impact GDP and employment, with primary impact between 2009 and 2011. It projected an increase in the GDP of between 1.4 and 3.8% by late 2009, 1.1 and 3.3% by late 2010, and 0.4 and 1.3% by late 2011, as well as a decrease of between zero and 0.2% beyond 2014. The impact to employment would be an increase of 0.8 million to 2.3 million by last-2009, an increase of 1.2 million to 3.6 million by late 2010, an increase of 0.6 million to 1.9 million by late 2011, and declining increases in subsequent years.
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