What will you do with your tax cut?
Should Americans spend it or save it? We have in mind the $21.5 billion in additional income they will receive from new tax cuts and higher social security payments between now and the end of 1982?Skip to next paragraph
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For the giant US economy - still mired in recession, with unemployment running at 9.5 percent and federal budget deficits for fiscal year 1983 projected at over $100 billion - the question is certainly timely. In his press conference this week President Reagan suggested that Americans should save, thus stimulating investment and productivity and offsetting massive federal borrowing to finance deficits. Yet other administration officials talk about a burst in consumer spending, thus rejuvenating a lackluster economy.
What, then, should Americans do?
In fact, most of them will likely do what they have been expected to do all along and what economic necessity dictates. As economists point out, many lower- and middle-income persons will spend their new income. The affluent, who will get more tax dollars, will more likely save and invest. Says White House economic adviser Murray Weidenbaum: ''We expect a major part to be saved and a major part used for consumer spending. That's the beauty of a tax cut.''
Considered by themselves, the combined tax cuts and higher social security payments will add a sizable $43 billion to the US economy during the next 12 months, half of that amount this year.
What is significant about all this is not so much the numbers themselves - pleasant as they will be for millions of Americans - but what they represent: Combined with the smaller 5 percent tax cut last Oct. 1, they constitute the first multi-year, large-scale reduction in the nation's personal tax burden in recent history. It is true that they tend to be neutralized by both bracket creep and higher social security taxes. But embracing the theory dubbed ''supply-side economics,'' the Reagan tax cuts mark a return to the economic and philosophical underpinnings of the Republican tax policies of the 1920s - expressed in the tax cuts of 1921, 1924, and 1926 under then-Treasury Secretary Andrew Mellon. The argument is that by slashing tax rates, higher rates of savings will translate into greater productivity.
Whether that reasoning holds now - given the quite different economic conditions of the 1980s, particularly the large federal deficits - is yet to be determined. However, the US does have a slightly higher savings rate than when Mr. Reagan came into office (5.5 percent now, compared to 4.6 percent in early 1981). The economy, though, has still not taken off as hoped by supply-siders.
As Americans patiently await results, some conclusions can be drawn:
* Thanks to a lower-than-expected inflation rate - and thus, lower- than-expected bracket creep for many taxpayers - the new 10 percent tax cut will be a more genuine tax cut than either the administration or lawmakers had anticipated. That means a few extra dollars in the pockets of many Americans.
* The fact that millions of Americans will show no net gain in disposable income this year, because of bracket creep and higher social security taxes, underscores the urgency of resolving the knotty issues of financing social security, controlling defense costs, and making government more efficient.
* Such tax cuts would be fairer in the context of comprehensive tax reform.
Spend or save, Americans can only hope the cut in tax rates spurs the economy to that greater growth in productivity and output so long needed.