When Demand is Sluggish, Tax the Savers

(Hemera)

People in the very upper tail of earnings distribution have seen their incomes rise far more rapidly than even the well-off folks in the top decile. That makes it hard to argue against President Obama’s proposed tax on millionaires, which just restores some progressivity to the tax structure. Nonetheless, we’ve seen arguments against it on grounds that it will reduce job creation (presumably because the rich have a higher marginal propensity to save than others). I’m always amazed at how concerned rich people and their apologists are about job creation (although their concerns are loudest at times when proposals are made to raise their taxes). It reminds me of arguments that got the short-lived tax on yachts in the 1990s repealed.

I don’t believe most macroeconomic arguments; but if one wants to argue on macro grounds, at a time of sluggish demand, if you want to balance budgets surely taxes should be raised on those with high propensities to save (arguably the well-to-do) and reduced on the rest of society, so as to stimulate consumer demand. You can’t have macro arguments both ways!


YX

Arguments are never about who is right, but rather who is loudest.

Mo

How? Those with lots of disposable income save in bonds and stocks mainly while poorer people save in cash. If you tax cash holdings you hurt those with less money. If you tax the sale of stocks and bonds you reduce liquidity.

Min

Poorer people don't save in cash; they don't save (at least, not nearly to the extent the affluent do). Because they live closer to the margin, they tend to spend what comes their way, thus stimulating demand. Which is exactly what we need right now in this economy of depressed demand.

jonathan

Same argument for credible inflation targeting: provide a stick incentive to put money to work because if you let it sit you lose value.

Scott Templeman

It would be easier to buy into the rhetoric if more than lip service was put towards becoming more efficient with government spending. They're burning through trillions at an unprecedented rate as our quality life decreases at a rate that mirrors their efforts. Perhaps it's time we struck "hair of the dog" from the economic prescription pad, rather than holding out for divine intervention to justify our wastefulness. It's bound to work eventually, but is it rational or responsible.

brookie_d

Our negative savings rate is part of the problem. People buy more than they can afford - more house, more car, more gadget purchases on credit cards. That is what created this problem. So, do we really want to discourage saving? I truly think that idea is idiotic.

Brian Parnacott

Increasing taxation on high-value savers isn't targeting the people "buying more than they can afford". By definition, the people "buying more than they can afford" are *not* saving. The suggestion is not to tax the $50K a year income family who's already stretched to the limit on their credit card payments, which is what it sounds like you're arguing against. The idea is to provide a financial reason for individuals who are simply sitting on large amounts of liquid capital because of insufficient demand-if tax policy finally reflects how important it is to get this money into the economy (and I mean really in the economy, not bouncing around skeezy hedge funds) we might see the so-called "job creators" finally live up to their name.

CS

Funny how even economists argue that taxes should be raised on "those people, they're more fortunate". (Not smarter, harder working, etc. Just luckier.)

I find it hard to take these arguments seriously, because of the built-in biases involved.

"Don't tax me, don't tax thee, tax that feller behind that tree."

Matthew

"...proposed tax on millionaires, which just restores some progressivity to the tax structure."

You write this as though the tax code is not already progressive. It is well established that the top 1% of earners (Incomes>~$380K/yr) earn 20% of the total income but pay 38% of the total income taxes paid. This top group is already paying effectively a double share. Exactly what percentage would you consider adequately progressive?

Tim

I never understand why Hamermesh feels the need to use the biased language he does.

Had he written “…proposed tax on millionaires, which just restores some progressivity to the tax structure” as “…proposed tax on millionaires, which increases progressivity of the tax structure” he would be stating fact, wouldn't change the purpose of the post, but would remove obvious bias.

Jeff

You are right in general but a key focus of the discussion should be on definitions. The new proposal from a tax perspective is much more palatable, and is a much more reasonable argument than the Republican idea that the poor should pay their share. However, the problem I have is with the total package. The bureaucracy is broken and the opposames on both sides are owned by the special interests. If he were to to drop the Construction Bank, tax credits for hiring, and school construction proposals, and add a repatriation proposal to the bill I think it would be extremely difficult to argue against. Even better would be to see him burn down the Department of Education. My biggest problem is both with the definitions being utilized and the ideals behind the legislation. Calling people that make a million a year as megarich is silly. It reminds me of books I read in junior high and high school about the negative stigmatism against the nouveau riche. We should be encouraging the idea and fostering it in the tax code that anyone in this country can start with nothing and either work hard or create a great idea, and become rich beyond their wildest dreams. The estate tax is a must old money (as you talk or I read your ideas as suggesting) needs to be put back into the economy. Also, I like the idea of Romney's encouragement of savings and capital gains breaks for those with incomes less than $200k or so a year. That said, I would like to see a massive shrinkage of the US government. We need massive pension/social security reform in this country, and the healthcare system must be modified to prevent fraud/abuse of the system.

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Craig

I don't really understand this. Since when did savings stop being about capital formation? The question is, are small businesses likely to reduce their plans to hire and invest if their taxes and expected taxes are higher? I also don't see how you can say the issue is not about demand, since when small business hire and invest that means demand for goods. I'm quite puzzled at this point.

russell

even a flat rate income tax would be progressive because those that earn more would pay more. what we have now is a massively progressive income tax. so your desire to "restore progressivity" is laughable. this fanatical focus on rates drives me crazy. warren buffett and obama have been making this point repeatedly...but the fact is even if the "millionaires and billionaires" were taxed at the same RATE as the secretaries, they would still be paying a lot more in actual dollars.

WholeMealOfFood

Tax savings? Worst. Idea. Ever.

Here's a clue: you can't spend your way to prosperity.

DanSanto

There are a mess of assumptions in Hamermesh's snippet. First is that the wealthy are saving at a high comparative rate - they get the money and then don't spend it at the same rate that mid/low income people spend money. Second is that the savings of the wealthy aren't providing jobs. Third is that the taxes would decrease the amount of savings, but not spending (at least not significantly). Finally that the use of the taxes would stimulate jobs more than the mixture of spending and saving that the wealthy are doing now.

I'm embarrassed to share a common name with Hamermesh.

The first is pretty accurate - wealthy do save at a higher rate than lower income groups.

The next couple assumptions are ass-backwards.

Savings are an integral and extremely necessary part of the economy, and provide the basis for loans in the economy. Those loans help the economy grow. With all the recent action of the Fed aimed at lowering interest rates to encourage loans, does it make sense to try to decrease the savings which form the basis of those loans?

Granted, the decrease in raw savings would not be particularly impressive, but neither would the tax revenue increase from the higher taxes. An extra $100bn isn't going to be much more than a drop in the bucket. Moving a $100bn out of savings by the wealthy over the course of 10 years won't affect the ease of loans any, but neither will it affect anything in the government. However, if tax rates on the wealthy were to be high enough to start seriously affecting government revenues, the effect on savings would also start to become significant.

Next, raising taxes on the wealthy by a significant margin won't just affect their saving rates, but also their spending rates. Spending (consumption) is one of those things that we're trying to get going in this economy, not limit.

Example: Wealthy save 50% and spend 50% of their income. (nice round numbers) Let's say taxes are raised by 15% on the wealthy. Their savings AND spending will drop by approx 15%. If the taxes grab $100bn/year, that is $50bn less saving and $50bn less consumption.

Then we have to look at how effective taxes are at stimulating the economy. Wow. I'm not even going to bother with that one. Taxes don't boost the economy. If they did, we could tax everything at 95% and have a rip-roaring economy!

I can't imagine what Hamermesh was thinking. Probably he just doesn't.

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jae

"I’m always amazed at how concerned rich people and their apologists are about job creation"
Businesses are not morally or economically obligated to create jobs. When businesses grow, jobs are created as result. It is not the RICH PEOPLE's duty to create jobs, but it's rather government's to allow an environment for the RICH PEOPLE to invest and grow their businesses so that jobs are created along the way.

William

You don't believe most macroeconomic arguments? Arguments or theories? And which ones? Since you don't believe most, which ones do you believe, and why? Anyone can have an economic argument, but having a logical discussion, based on theories or emperical evidence (which theories should be based on) is an entirely different animal.

John B

I have no problem with taxing the wealthy but the latest proposals are nothing but politics and demagoguery.

The president keeps saying he is going after "millionaires and billionaires" and seeks to stir up the mobs to violent reactions. His actual proposals heavily tax people who are not close to being millionaires and billionaires" but he keeps silent on that.

When Hitler had problems, he blamed the Jews in order to distract people from who was really causing the problems and to give them someone to hate. Obama is playing the same game--give the mobs a group to hate and distract attention from his failed policies.

Tim

http://en.wikipedia.org/wiki/Godwin's_law

DS

"People in the very upper tail of earnings distribution have seen their incomes rise far more rapidly than even the well-off folks in the top decile."
It's not technically correct to say that the "people" at the top have seen their incomes rise more rapidly, unless you're looking at the same people across the relevant time period, because that group is highly fluid (as is the top 10%, top 1%, etc.). It's NOT the same "people" year after year. For example, Table 4 here (http://www.irs.gov/pub/irs-soi/07intop400.pdf) shows that there were 3,472 different filers in the top 400 by AGI from 1992-2007. Only 0.2% (7 filers) were in it every year; 72.4% were only in the top 400 once, another 12.2% were only in it twice.