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Study suggests that tax cuts for wealthy folks won’t spur U.S. economy

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An Applesauce commenter opined yesterday that an extension of the Bush tax cuts for the wealthiest Americans would stimulate the economy.

But RESEARCH by Moody’s Analytics suggests otherwise.

A few excerpts:

Give 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.

(Snip)

Some economists voice caution about the promised effects of a change in tax rates. The nonpartisan Congressional Budget Office in January analyzed policy options and possible short- term effects on growth.

“Policies that temporarily increased the after-tax income of people who are relatively well off would probably have little effect on their spending because they generally would be able finance their consumption out of their income or assets without such a change,” CBO director Douglas Elmendorf testified to Congress on Feb. 23.

On the other hand, tax relief for families with “lower income, few assets and poor credit would probably” spur spending, he said. Elmendorf said because of job losses and a drop in assets over the past two years more families “probably fit that description now.”

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6 Comments

  1. Across the board tax relief will have the most stimulative effect.

    The argument presented above is pretty funny.

    Liberals view the “rich” as some sort of alien species that are different than other people. In my estimation, people are people no matter how much money they have. You might view an exception for the off the charts wealthy, those that have 100’s of millions of dollars and will never need to worry about how much they have to spend, but remember, that’s not the only group the Democrats are targeting.

    In their minds you are rich if you make more than 200,000 a year.

    “If we give the rich more money they will just save it anyway.” Maybe so, but they may spend it.

    Look at the converse statement, “If we take money away from the rich they will..what?…spend more money? ” In the current environment, if you take more money away from those making 200,00 a year they will spend less,likely much less and maybe even save more. Will that be stimulative?

  2. We are talking about 2% of the people. That is hardly mainstream.

    Under the Democratic plan, ALL people will receive a tax cut relative to just letting the republican tax increase go into effect.. Don’t forget, it was the republican plan when they passed the tax cuts to let them expire after 2010 and the tax rates return to the 2000 levels. The difference between the Democratic and republican current plans is that the republican plan gives the rich bigger tax cuts than the Democratic plan.

  3. Jerry,

    If I pay more in taxes next year than I do this year that is a tax increase. Period. That is the way I will view it and I will adjust my finances in kind.

    This means I will have less discretionary spending and potentially less charitable giving. Does that sound stimulative to you?

  4. Craig Knauss

    Terry,

    Since you brought up savings accounts, may I remind you that it was Reagan who eliminated the small tax exemptions on savings account interest. I believe it was the first $250 per saver, or $500 per couple was exempted from taxes. Reagan’s reform left me paying taxes on every cent I earn on my savings. However, he retained the exemptions on stock dividends. (How generous of him!) Since most working stiffs didn’t own stocks back then, that was significant. And Reagan decried the fact that the tax rate on the wealthy was 55%, and gave them a big tax break, even though the IRS said the average paid by them was only 28%.

    And I took an economics class. It was called Economics of Government Finance. Maybe you should try it.

  5. I’m not an accountant or an economist, but I would think that would be the same logic that might be applied to the estate tax.

    Why should the government take 50% of what they have already taxed as earned income?

  6. Craig Knauss

    Terry, I did take an accounting class. The same one the MBA students take. Have you taken one? I can read an income statement and prepare a balance sheet. Can you? So what’s your point? If we shouldn’t tax the first $250 of stock dividends, then why tax any of it? And why should we tax all savings interest? That discourages people from saving and the tax stops them from spending. And the banks and S&Ls could have used the cash reserves. Also, I noticed that you deftly avoided the discussion of the “overtaxed” wealthy that Reagan claimed were paying 55%, when in reality they were only paying a slightly higher rate (28%) than I was. And maybe you’d like to tell us why Reagan’s “trickle down” theory didn’t trickle down.
    BTW, just what economics classes DID you take? Any? You don’t seem to comprehend government finance and the impacts of taxation very well. Or how it’s the middle class that holds our economy together.

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