With all the information out there that proves that the marginal propensity to consume of the middleclass is more so than the wealthy it is sad that the media does not call Republicans on the stimulative properties of tax cuts to the rich relative to the budget deficit as opposed to that solely for the keeping of tax cuts for the middle class.
By Timothy R. Homan – Sep 13, 2010 11:48 AM CT
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 :S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja”>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 :S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja”>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 :S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja”>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.”
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.
Stock-market performance is the “primary factor that is driving the savings of the top 5 percent of households,” said Mustafa Akcay, economist and co-researcher of the savings data.
Federal Reserve Data
The Moody’s economists examined saving rates by income groups back to 1989. Their study uses statistics from the Federal Reserve’s quarterly Flow of Funds report, which gauges the net worth of households, and the Fed’s triennial Survey of Consumer Finances, a measure of balance sheets, pensions and incomes of U.S. families.
When tax legislation was signed by Clinton in 1993 — raising the top tax rate to 39.6 percent from 31 percent — the saving rate fell from 12.1 percent in the second quarter to 9.5 percent in the first quarter of 1994. The Standard & Poor’s 500 Index rose 1.9 percent from July through September, after little change the previous three months.
When the first Bush tax cuts were signed into law in June 2001, pushing the top rate down to 35 percent, the wealthy boosted savings. The saving rate climbed to 2.8 percent in the first quarter of 2002 from minus 2 percent in the second quarter of 2001. The increased savings coincided with a 1.1 percent decline in the S&P 500 index.
Second Round
After the second round of Bush tax cuts in May 2003, the rich also increased their saving, with the rate climbing to 7.6 percent in the first quarter of 2004 from 2.2 percent in the second quarter of 2003, the Moody’s data show.
The analysis found some similarities across income levels in the 2001 and 2003 data. The wealthy and the remaining 95 percent of Americans both saved more of their incomes after the Bush tax cuts. The saving rate is defined as personal savings as a percentage of after-tax income.
The political debate over extending the Bush-era tax cuts, which expire at the end of the year, is intensifying with the approach of congressional elections in November.
Obama, at a White House news conference on Sept. 10, said the push by Republicans to extend cuts for the wealthiest Americans is a “bad idea” because it would cost $700 billion in government revenue at a time of record budget deficits.
Rich Americans Save Tax Cuts Instead of Spending, Moody’s Says – Bloomberg
