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. President Barack Obama wants to extend the cuts for individuals earning less than $200,000 and couples earning less than $250,000 while ending them for those who earn more.
“I would tend to wonder how much the tax cut actually influences spending behavior,” said Chris Cornell, an economist who mined government reports back to 1989 for West Chester, Pennsylvania-based Moody’s Analytics. “Spending by the top 5 percent of households seems much more closely tied to business- cycle issues than it does to tax-cut issues.”
Shocking, I know. Tax cuts for folks making more than a quarter million a year don't get spent but saved. Great for banks and investment firms, bad for anyone else.
Two things: one, let's not forget that under Obama's plan, everybody still gets the current low tax rates on that first $250,000. Marginal tax rate hikes are just that. Second, the paradox of thrift means that upper bracket tax break gets saved, not put into new capital or new hiring or expansion of business.
Let's also not forget that marginal tax rates historically have been much, much higher than 39.6%. If the wealthiest among us were in a millionaires tax bracket of 50% or more only on income above that million a year, they'd still be paying less taxes than just thirty years ago. From a historical perspective, taxes are the lowest overall in generations.
The Tea Party would have crucified Eisenhower or Nixon. Food for thought.