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Subscribe to RSSDespite higher tax bills this year, the richest Americans will keep spending. If a pullback in savings continues over the long term, however, some economists say an unexpected consequence could be the erosion of investment capital.
The top income tax rate is now 39.6 percent, and the top 1 percent of households will pay, on average, 35.5 percent in combined income and other federal taxes on income of $1.4 million, according to the Tax Policy Center, a research group.
"I think the way taxes are going up on the wealthy, it’s probably for the foreseeable future," said Maury Harris, UBS managing director and chief U.S. economist.
In a recent report, Harris wrote, “[T]ax increases on the affluent... should not have much negative consumption impacts as the affluent trim their savings.”
For now, this is good news — it's better to keep the wealthy spending their money, Karen Dynan, a senior fellow at the Brookings Institution, said via email. "One of the reasons that the economy hasn’t recovered more quickly from the Great Recession is that consumer demand has been weak."
If companies see spending or confidence nosedive, they'll retrench at the expense of the labor market, she said. "If businesses come to doubt that people will keep spending, they’ll be even more reluctant to hire than they already are."
Conventional wisdom would suggest that more consumer spending always is good for the economy, but Harris said this sustained spending, especially by the richest households, comes at an expense. “It’s not like this money was being stuffed under a pillow,” he said. “In the longer run, the consequence is that you’re reducing the amount of seed money in the economy.”
As of 2004, the top 1 percent of earners socked away a little more than half their income, money that was funneled into the stock market, private equity, real estate and a host of other investment vehicles.
One reason the affluent save so much is because they want a cushion against volatility or years when their portfolios could go into the red, said Jonathan Skinner, professor of economics at Dartmouth University. "Others may want to prepare for retirement... Still others may be accumulating assets in a company so that they can continue to control the company," he said via email.
Skinner suggests a shortfall in investment by the 1 percent could be countered by a surge of investment from overseas. "This decline in new domestic savings could, however, be offset by foreign [investors] seeking a higher return in the U.S.," he said.
Harris concedes that a pullback in savings and investment by the wealthy won't cause short-term pain in capital markets. "For the time being, there's plenty of investment capital," he said, thanks to loose monetary policy and a relaxation of bank lending standards.
But over the long term, Harris said tax policy needs to encourage savings rather than spending to fuel the economic engine of capital markets.
Dynan agreed, pointing out that countries where people save more have higher rates of business investment. "Higher investment is associated with stronger productivity growth. If wealthier Americans were to pull back on saving, it could hurt the productive capacity of our economy," she said.
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Tax bills for rich could reach 30-year high
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Promote this writer... She must have studied for several minutes before coming up with this brain fart...
Anyone who is in the 39.6% income tax bracket and does not have a good investment tax accountant deserves to be screwed. Not even Mr. 15% income tax a year Mitt Romney was that stupid.
The rich will spend .....While the middle class dwindles into nonexistence. We are becoming the classic socialist two class society ...
No, we are becoming more capitalistic. Rich and poor. Have and have not. That's capitalism!
Jim,
While I agree that is where capitalism can lead to, I also don't think it's where it has to lead. With capitalism the rich will get richer, but that doesn't mean the poor get nothing. As an example, those at the poverty level in the US have more purchasing power than 80% of the rest of the world. This is example of capitalism bringing up both the rich and the poor.
As to the US today, what we have now is not really capitalism...it's a bastardized version where success is becoming more and more determined by cronyism rather than individual merit.
Most rich have investment income which is taxed at 15%, the tax increase didnt touch that income so of course the rich will continue to spend at the current rate.
TAX the rich. This is a classic case of an economist talking out of their butt. Economists should be TOTALLY ignored. Calling economics a SCIENCE is wrong. It is simply being a MOUTHPIECE for whoever is paying you or your own opinions if you are wealthy.
The ANSWER to our economic problems is simple.
1. GET RID of the cap on SS taxes. Tax EVERY DOLLAR. LOWER the SS age and RAISE the benefits. Millions retire and their JOBS open up.
2. GET RID of the insurance companies. Go SINGLE PAYER. That save 30% of EVERY HEALTH CARE DOLLAR. Why are we paying insurance companies ANY of our health care money when they provide NO HEALTH CARE.
3. Go to a RESULTS based payment system. NO FEE FOR SERVICE.
These will result in a HEALTHY ECONOMY. Tax cuts for the wealthy are SO IGNORANT and counterproductive you would have to be a member the GOP and/or the TEA PARTY to think they would help.
ummmm your Barry got his tax increases on those making over $450k in which he "promised" to get some spending cuts. Then he moved the goal posts (AGAIN) now wanting to close loopholes one of which is writing off your mortgage interest. That little loophole helps EVERY homeowner regardless whether you are rich, middleclass, poor. You cannot tax and spend your way into prosperity SRS, but you left lapdogs still yip for your master. One thing you left out of your IGNORANT rant was EVERYONE SHOULD HAVE SKIN IN THE GAME and if you do NOT pay anything into SS you get NOTHING out of it!
Boy am I relieved..... For a while there I was really afraid that rich people might stop buying stuff. This is the hard hitting journalism I expect from a person with a 4 year degree and 40 hours devoted to writing. I can't wait for next weeks installment "Coupon Clipping Rises as Millionairs Tighten Belts"......
This is wonderful news! The rich will remain rich, and continue to act like it. All is right with the world.
I've never understood the problem with other people succeeding. Sure, Bill Gates and others have made billions, but their ideas have also employed millions and helped tens of thousands of others become millionaires.
What's wrong with that?
Because, Ron, a good many of the "rich" (including large banking firms) make most of their money through investment. They put downward pressure on companies to "maximize shareholder value." That puts the focus on excessive short term gains rather than focusing on the long term health and growth of any particular investment.
The result? More often than not, innovation and sales are not enough to provide a "fair and reasonable" return on investment and so the cutting of fixed costs is introduced. The primary drain on fixed costs? Employee salaries and benefits. Hence, the downward pressure by the financial sector on companies to maximize profits leads to the offshoring of jobs to markets where (the exploitation of) cheap labor is abundant.
Nobody will begrudge anyone from earning money. But doing it at the expense of the working class? Well, I think the working class takes great exception to that.
That creates a huge disadvantage for American workers who simply cannot compete with overseas labor. It forces American workers then, especially those entering the workforce to accept lower wages and fewer benefits. As the cost of living continues to increase, also due in part to maximize shareholder value, the lower wages accepted by American workers in order to remain competitive drives them further and further toward the poverty line.
Taxes did not go up on those who happen to be wealthy since the federal government does not tax by how rich some folks are - not constitutional. They do tax based on annual income, and many pulled income forward in late 2012 to avoid the higher tax rates for 2013 on that income.
As the author stated, investment capital is now underused (low
demand) because businesses don't want to expand consumer products &
services supply until demand convincingly demands it.
When the economy is booming, demand for investment capital will necessarily increase. However, the additional investment capital will not only come from
the rich, but also from the middle class and I hope the poor class.
Does anyone know or are they willing to speculate on which classes, or groups
thereof, will provide the most investment capital, when the economy is booming?
If it is the middle and poor classes, or even if they are just a major provider,
then it would certainly make intelligent business and investment sense for all
to adopt a strategy that focuses on expanding jobs for the middle class to
promote a booming economy. That would obviously be a win-win outcome.
(c) 2013
It seems odd reading this article given all the other ones I've read regarding the economy. All the other ones I recall reading said the middle class is the driving force for the economy and account for 80% of spending. Seems odd to me given they just did an about face on the driving force of the economy.
I suppose the ghist of this article is the rich need to keep their money and continue to pay peanuts for the sake of social status. To hell with the Hard working middle class who have to work two jobs just to make ends meet.
I think I'll file this article where it belongs... In the trash!!!
If you have to work 2 jobs to make ends meet then you made a poor career choice. Nice of you lapdogs to keep that class warfare thingie going from your master. The jealousy and hypocrisy of the left is disgusting. Please name me a "poor" politician on the hill or in the WH?????? You miserable people think ANY of them care about the middle class or poor -- NO THEY DON'T (but don't let that keep you from being deluded), they care about their next election and amassing MORE taxpayer dollars as well as "perks". They do this by enslaving you with taxpayer funded welfare, nothing more!
@Dotties - Oh please, stop with the class warfare nonsense. That talking point has gotten old and stale. And FYI. there are way too many people that were thrust into a situation where they have to find two mediocre jobs, paying minimum wage, given there aren't any jobs in their profession. The only thing disgusting is your ignorance an lack of compassion for your fellow Americans. However, I do agree with you on the majority of politicians care more about their next election vs. doing what's right for their constituents. Oh, and serving their corporate masters.
Why worry about investment capital, the Fed is happily printing more capital than the economy can efficiently use anyway.
And define rich. The bulk of the money in the tax code changes this year will come not from what mst people define as rich, but from folks who have incomes between $450K and $600K who live in high cost urban areas. I strongly doubt they were saving half their income before they were targeted, and I think you'd be shocked to find how many of them live paycheck to paycheck, and there are a whole lot more of them than folks who routinely make over $1M per year.
While I think consumer spending will keep growing, both the payroll tax and this tax will cut into that growth and continue to act as a brake on GDP growth.
Even if the rich paid 60% taxes they would still earn >200 times the average American
So what's your point???
Why is it these articles talk about the rich and then move into a talk about business like they are one and the same. Individuals are taxed at a higher rate, the businesses are not. 2 different entities.
More bla bla bla. First we get the story that if the government spends less money the economy will falter. But if money is taken away from the rich and given to the government investment will suffer.... and I suppose as a result, businesses will suffer. In the mean time, the middle class people who are struggling to get by and who certainly spend a larger share of their income stimulating the economy, well screw them.