Saturday, September 18, 2010


From Bloomberg:

Rich Americans Save Tax Cuts Instead of Spending

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.


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.


The BIG assumption on which virtually all right-wing ideas about economics are based is that when you cut taxes for the wealthy, such an action, in the long run, generates more tax revenue than you had before the cut because the wealthy supposedly spend their "tax relief" on business expansion, which supposedly then stimulates the economy. Never mind that, right now, the problem facing our economy is that consumers aren't spending, which means that stimulating the business side will simply result in even more excess capacity than exists at the moment. The reality about cutting taxes for the rich is that it doesn't even result in increased investment. And that's not an assumption made by some dissident economist in his office at some university somewhere: it's a fact based on actual real world data.

Because this flawed assumption plays such an extraordinarily powerful role in US politics it is worth repeating: tax cuts for the wealthy do not result in increased business investment. Instead, the wealthy simply drop their savings in the bank, thereby increasing their net worth. That is, all the high end tax cuts this nation has been enduring for some three decades have done is to make the rich get richer. At the expense of everyone else. Consequently, almost the entire discussion on economics at the national level does not reflect reality.

Actually, it's funny, in a sort of gallows way. The article suggests that "the findings may weaken arguments by Republicans and some Democrats" who favor, as usual, tax cuts for the rich. This won't happen, if history is any indicator. Intuitively, the idea that less taxation means more tax revenue doesn't make sense--"voodoo economics" the first President Bush called it right before the Reagan people tapped him to be the Gipper's running mate back in 1980. And there's never really been any actual hard evidence to suggest that it does make sense. Rather, tax cuts for the rich, as a concept, has always been driven by political hype. I see nothing in Washington to make me think that this Moody's study will in any way deflate that hype.

You see, reality no longer plays a meaningful role in the affairs of our nation.