Give the wealthiest Americans a tax cut and history suggests they will save the money rather than spend it.
The two Moody’s economists also note that wealth effects from changes in the value of stock portfolios have important impacts on how much the well-to-do consume. I have to wonder if Harm Bandholz of UniCredit Global Research grasps any of this in light of the following:
Economist Harm Bandholz said discouraging the wealthy from spending could weaken the economy, something Republicans argue will happen if the Bush-era tax cuts expire. “Most of the consumption growth is coming from the higher- income groups,” said Bandholz, chief U.S. economist at UniCredit Global Research in New York. “The lower income groups, they are barely living hand-to-mouth.”
Duh! Consumption among the wealthy is up because the stock market has revived not because they got a tax break. And “living hand-to-mouth” is essentially facing borrowing constraints which represents an exception to the Life-Cycle Model. So tax cuts for the poor will have a larger impact on consumption than tax cuts for those who are not borrowing constrained.
Horan also relates this analysis to the political debate over tax policy.