Tuesday, September 14, 2010

Tax Increases on the Rich Will Not Greatly Reduce Aggregate Demand

Timothy Homan reports on a recent analysis from Chris Cornell and Mustafa Akcay of Moody’s Analytics that confirms what those of us who have been preaching the policy implications of the Life-Cycle Model have suspected:

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.


Jazzbumpa said...

If there is even one shed of evidence supporting the proposition that tax cuts help the economy in any way, or that tax increases harm it, I love to see it. Seriously - it don't think there is any such evidence in American economic history.

Tax rates have gone down, down, down, over the last 30 years while DGP growth has stumbled lower and wealth disparity has increased dramatically. Now we are flirting with deflation and a possible depression.

Is there any metric that makes our decades long tax cutting binge look good?


Jack said...

I'm sure that the Peterson Foundation, a non-profit (but highly partisan) public relations organization, must have some "studies" of economic performance that would support the thesis that tax cuts benefiting the wealthy will eventually benefit the general economy (though maybe not us peons).

Oh, I know that think tank is the preferred description for such bastions of intellectual curiosity, but the fact is that they generally start with an assumed premise and then find the data that seems to be supportive of their ideas. And if the data isn't quite what it was thought to be then they'll do an analysis that explains the disparities. That's how one supports the idea that more money for the wealthiest Americans is equivalent to a good life for all of us.

Debra said...

I think that it is important to understand just where the IDEA of tax cuts for the wealthy comes from, and what it MEANS...
The idea of tax cuts for the wealthy carries with it a number of subtle ideological and POLITICAL foundations that should not be neglected BY CONSTANTLY harping EXCLUSIVELY on the economic effects, as though these effects were THE ONLY thing we were interested in. As though taxation were not the POLITICAL ACT that largely contributes to building the symbolic COMMUNITY of "we the people".
Taxation is meant to bring us together.
ANY act that disqualifies taxation to the extent that has been done these recent years is an attempt to.. PARTICULARIZE and ATOMIZE us increasingly into INDIVIDUALS at the expense of "the people" and "the COMMON good."
Behind these measures is the attempt to DESTROY the LEGITIMACY of the GOVERNMENT to represent us and bring us together.
This is a stiff accusation, but I hold by it.
It is also... the LOGICAL endpoint of a "liberal" ideology. Taken to its RATIONAL extreme.
See why YOU don't REALLY want to be rational all the time ?? (Not as though, as INDIVIDUALS, we really COULD be rational, anyway...)
These measures to reaffirm aristocracy have the unfortunate results of destroying legitimate government in our own eyes.
But... ARISTOCRACY should always be defined in terms that do not reduce it to the simple question of $$$ and cents, anyway..

Don Levit said...

I think it is wise to look beyond the economic effects of taxation to see its ethical and moral implications.
I understand the Bible refers to speech more than any other subject, with money coming in second.
So, how we look at taxes, and money in general, does have ethical and moral implications.
If anyone has the figures on the amount of taxation paid by the top 10% of households, I would like to see it.
I would gather that 70-80% of all taxes are paid by the top 10%.
Does that mean that the taxes are skewed unfavorably upon the top 10%?
No, it means that the bottom 90% are not earning their fair share.
If the economy depends on the consumer for 70% of its GDP, we need more consumers in the game, not only spending, but also investing, their discretionary incomes.
Otherwise, we depend excessively on the top 10-20% of consumers to drive the economy. This is when Consumption becomes a disease.
It helps us all if the incomes are more equitably distributed.
Death and taxes are not only certain, they are great equalizers in the game of life.
At the end of the game of chess, both the pawn and the king go into the same box.
Don Levit