Tax Cuts for High Earners Leads to Savings

Via Bloomberg:  Rich Americans Save Tax Cuts Instead of Spending, Moody’s Says

Hand the wealthiest Americans a tax cut and history suggests they will save the money rather than spend it.

Tax cuts in 2001 and 2003 under President George W. Bushwere followed by increases in the saving rate among the rich, according to data from Moody’s Analytics Inc. When taxes were raised under Bill Clinton, the saving rate fell.

[…]

The Moody’s research covering couples earning more than $210,000 found that spending by the wealthy is more likely to be influenced by the ups and downs of the stock market than changes in income-tax rates.

The above is both interesting and strikes me as not especially surprising.  If one is making a large amount of money, one is already likely to be able to buy more or less what one wants in terms of basic consumer goods.  As such, the likelihood that a tax cut would lead such a person to spend more seems smaller than, say, putting more money in the hands of someone who makes less money.

As such, the stimulative effect of extending the Bush tax cuts for upper level earners is questionable.  This is not to say that there aren’t various arguments for various approaches to said tax cuts, but it does blunt the GOP’s current arguments on the subject.

Of course, this is a moot point in many ways as at the moment it would seem highly unlikely that the Bush tax cuts for upper-level earners will be extended.

FILED UNDER: Economics and Business, Quick Takes, US Politics
Steven L. Taylor
About Steven L. Taylor
Steven L. Taylor is a Professor of Political Science and a College of Arts and Sciences Dean. His main areas of expertise include parties, elections, and the institutional design of democracies. His most recent book is the co-authored A Different Democracy: American Government in a 31-Country Perspective. He earned his Ph.D. from the University of Texas and his BA from the University of California, Irvine. He has been blogging since 2003 (originally at the now defunct Poliblog). Follow Steven on Twitter

Comments

  1. Jeff says:

    when they say saving do they also include investments ?  If so then it does stimulate …  even if it is just dropped into a asavings account isn’t it then available to be loaned to someone else and spent ?

  2. Savings provide capital for investment, yes.  However, the alleged logic of the stimulative effect of tax cuts is that it leads to near-immediate consumer spending.   Indeed, the issue at hand is that the there is currently plenty of capital available for investment at the moment, but no one is investing because of anemic consumer demand.  As such, more savings would not likely have a stimulative effect on the economy.  Rather, it would just be parked money.

  3. James Joyner says:

    The argument for flatter taxes is “it’s your money, not the government’s.”  Everything else is pretty much a disingenuous side show.

  4. Steve Plunk says:

    Strategic tax cuts like the Bush tax cuts do stimulate the economy in many ways.  That higher savings rate of the rich leads to not only investment capital but also capital for loans.  There’s no such thing as “parked money”. Tax cuts also provide confidence in the future of business spurring investment and hiring.
     
    In our current situation a higher savings rate would shore up bank balance sheets as well as provide money for loans.  Most importantly it would signal the economy that the present administration is calling a truce in it’s war of plunder with the American people.
     
    I still like Jame’s point.  It’s my money, the government is a bloated, wasteful, irresponsible entity so why shouldn’t pay less taxes?

  5. 1)  I think James’ point is where the argument needs to go, but I don’t think that that will be the GOP’s main mode of attack.  it gets mentioned, yes, but the main argument has been, and continues to be a combo of “tax cuts are stimulative” and/or “tax cuts increase revenues.”

    2)  I will add, however, that we also do have to have a serious discussion about the deficit and the debt, which includes (like it or not) the issue of tax rates (and not just on upper earners).

    3)  Yes, there are benefits to increased savings.  However, that is not the argument that is being made in the political discourse on this issue at this time.

    4)  In re: money for investment, I will note again, the argument is being made (by Republicans, I will note, amongst others) that there is currently a lot of money for investment “on the sidelines” that investors are unwilling to spend.  What is lacking at the moment is increased consumer demand (and there was some good news on that count in terms of the  August figures).

    5)  Back to this: “It’s my money, the government is a bloated, wasteful, irresponsible entity so why shouldn’t pay less taxes”

    The problem remains:  what to do about it and there are positively no easy answers on that count.

  6. Herb says:

    “I still like Jame’s point. It’s my money, the government is a bloated, wasteful, irresponsible entity so why shouldn’t pay less taxes?”

    Because that bloated, wasteful, irresponsible entity governs the economy that allows you to make so much money. You can make tremendous amounts of money in our system, but everyone –everyone– has to pay the freight. The “it’s my money, not the government’s” argument ignores that concept.

    In reality, it’s not your money until the government takes their skim. That’s how it is the world over. If the objection is the size of the skim, well…we can talk about that. But if the objection is that the skim is taking place…welcome to the modern world, folks. Might as well rail against all the fences cutting up the prairie…

  7. reid says:

    SP, maybe you should move to a gated compound in Somalia where government wouldn’t be such a burden to you.
     
    You seem somewhat serious; why write things like this: “the present administration is calling a truce in it’s war of plunder with the American people”?  That kind of hyperbolic nonsense is really irritating and undermines any chance for serious dialog.

  8. legion says:

    Yes, but a lot of people assume all investments are equally beneficial to the economy, and that ain’t necessarily so. Over the last decade or so, there has been an enormous increase in investments in things that don’t translate to jobs, capital purchases, or real benefit to the overall economy – things like patent trollers and lots of other IP that are only used as leverage for other investments rather than actually manufacturing things. The housing/banking crisis is a great example – people monetizing pieces of paper that really shouldn’t be monetized. _That’s_ where much of the Bush tax cuts went, and it’s why no jobs were really generated by them (or will be, until we get back to an economy that rewards people for producing things more than for gaming the system).

  9. Steve Plunk says:

    herb,  Agreed.  In reality it is about the level of taxation.  I understand the price paid for living in a civilized society with roads, public schools, and a common defense.  But I do take issue with government programs that are wasteful and unnecessary.  I also realize what I consider wasteful and unnecessary a fellow citizens might consider critically needed. (As a side note my city just opened a $2.1 million bike overpass that was financed mostly by stimulus funds.  The need is questionable, the stimulus effect nearly nonexistent, and the fact we are broke and borrowing the money makes it the kind of thing I complain about.  And it happens a thousand times across the country every day.)  I just think we should always start with the fact the money belongs to the citizen first who then contributes to the government.
     
    reid,  I guess suggesting I move to a gated compound in Somalia isn’t hyperbole?  Of course it is and we all use it at one time or another to make points and raise emotions.  My statement didn’t undermine the chance for discussion it encouraged it.  I’m not the only citizen who feels plundered while other enjoy the largess of government spending.  Crony capitalism is at an all time high under the Obama plan.  That statement may be irritating as well but it is reasonable and rational.

  10. john personna says:

    Don’t forget that we are in a bond bubble(*) and that net flows to equities from individual investors are still negative.
     
    Jeff and Steve hope that savings equals investment, but if the savings are going to treasury debt then there is really a strange loop where the tax cut creates the debt and helps fund it.
     
    * – used in part figuratively, to describer the bond-love going on, and in part ironically because I think “bubble” is overblown (to double up on metaphor).

  11. john personna says:

    Investors doubled their holdings in cash this month to the highest levels in more than a year as money managers remain divided on the outlook for the global economy, a BofA Merrill Lynch Global Research survey showed.
    A net 20 percent of respondents, who together manage about $579 billion, were “overweight” cash versus benchmarks as money managers reduced their holdings in equities and commodities. Even so, hedge-fund gearing levels jumped to a two- year high.

     
    http://www.bloomberg.com/news/2010-09-14/investors-divided-on-outlook-pile-back-into-cash-merrill-says.html
     
    Did someone (conservative) above say it was a net win that rich guys were at least keeping their money in broken banks?  lol.

  12. Herb says:

    But I do take issue with government programs that are wasteful and unnecessary.  I also realize what I consider wasteful and unnecessary a fellow citizens might consider critically needed.

    Yes, I’m in agreement with you here.  However, I’d like to remind you that the right in general, and Republicans in particular, are also into wasteful and unnecessary programs.
     
    I’m sorry about the non-stimulative (but presumably permanent) $2.1 million bike overpass that people in your city will be using for the next 50 years….but it’s a pittance of what we’ve paid for the Iraq adventure.   If we’re talking bang for our buck, I don’t think you can argue that we wasted $2.1 for a bike path, but the billions we wasted in Iraq were a “good value.”
     
    Do you?  And if you think Iraq was a huge waste of money, don’t you think it’s a bit minor to worry about $2.1 million?  (Also…considering the materials and labor costs, $2.1 million doesn’t seem too outrageous for a construction project.  Maybe you just don’t like cyclists?)

  13. john personna says:

    To paraphrase a number of Right icons: “Don’t let the cyclists win!”