Extending the Bush tax cuts and the myth of the thrifty rich

New research shows that the wealthy tend to spend when offered tax relief, making some question if ending the Bush tax cuts to the wealthiest Americans will hurt the recovery.

Shannon Stapleton/Reuters/File
A Turbo Tax software software filing package is seen on display at a Staples store in Manhasset, N.Y., in this April 15 file photo. President Barack Obama and most fellow Democrats want to let Bush-era tax cuts expire for those earning more than $200,000 and households making more than $250,000. Others argue the tax cuts will help spur consumer spending and strengthen a weak economy.

When trying to justify why they oppose extending the Bush tax cuts, despite their general aversion to austerity and preference for "stimulus", leftists asserts that the rich supposedly save more than others and that a more effective stimulus therefore would be to let the tax cuts expire and give the extra revenue to others.

But there are at least three problems with this plab. First of all, what if due to Republican and Blue Dog Democrat opposition, the handouts to others aren't politically possible? Wouldn't it then given the alleged dangers of austerity be a second best solution to make a deal with the Republicans and extend the tax cuts to prevent the austerity chock from higher taxes next year?

Secondly, even people who save spend as their savings are invested and helps increase either domestic investments (if invested domestically) or net exports (if invested abroad).

Thirdly, as this New York Times article makes clear, it is actually a myth that people with high income are more thrifty than others:

"the Top 5 percent in income earners — those households earning $210,000 or more — account for about one-third of consumer outlays, including spending on goods and services, interest payments on consumer debt and cash gifts, according to an analysis of Federal Reserve data by Moody’s Analytics....

....By spring of last year, the savings rate — which represents the percentage of after-tax income not spent — of the top 5 percent of income earners had turned negative, according to the analysis by Moody’s Analytics. That meant the group was spending more than it made.

Less well-off consumers remained more frugal, most likely constrained by unemployment, declines in home values and the disappearance of easy credit."

It should thus be clear that even from a Keynesian perspective, extending the tax cuts makes sense.

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