A headline on Bloomberg.com today blares, "Rich Americans Save Tax Cuts Instead of Spending, Moody's Says."
Timothy Homan reports:
Timothy Homan reports:
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. Bush were 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 findings may weaken arguments by Republicans and some Democrats in Congress who say allowing the Bush-era tax cuts for the wealthiest Americans to lapse will prompt them to reduce their spending, harming the economy.
Later in the article, economist Chris Cornell is quoted, "Spending by the top 5 percent of households seems much more closely tied to business- cycle issues than it does to tax-cut issues."
The entire article is based on a false premise. Why is it that we should care only what the wealthy spend?
What they save, after all, can become business investment, which is what has been hammered during this recession and especially by the extreme regime uncertainty that has characterized the past two years. The images below from this recent post by Cato scholar Mark Calabria reveals that consumption is back to normal, while fixed private investment is down by 20%. The fixation on spending reflects flawed neo-Keynesian reliance on over-aggregation and mythical "multipliers."
The entire article is based on a false premise. Why is it that we should care only what the wealthy spend?
What they save, after all, can become business investment, which is what has been hammered during this recession and especially by the extreme regime uncertainty that has characterized the past two years. The images below from this recent post by Cato scholar Mark Calabria reveals that consumption is back to normal, while fixed private investment is down by 20%. The fixation on spending reflects flawed neo-Keynesian reliance on over-aggregation and mythical "multipliers."
On the empirical point about the wealthy saving much of tax cuts, that seems consistent with the permanent income hypothesis, which postulates that we try to smooth consumption over our lives. Something that changes expectations of lifetime wealth tends to affect consumption patterns.
Tax cuts that are expected to be temporary, therefore, would mostly be saved, while those expected to be permanent would be mostly spent. If the wealthy save tax cuts, it's a clear sign they expect them to be raised again when the bills come due for the current government spending binge.
Tax cuts that are expected to be temporary, therefore, would mostly be saved, while those expected to be permanent would be mostly spent. If the wealthy save tax cuts, it's a clear sign they expect them to be raised again when the bills come due for the current government spending binge.
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