The Republican-Democratic debate over income tax rates and the size of government has been long on rhetoric but short on data. What does published research say about what different economic groups do with savings from income-tax cuts? Will the economy slow if Washington cancels tax cuts on millionaires and billionaires?
Most experts agree that tax cuts can stimulate a weak economy over the short term through increased consumption and investment, provided the money flows to people who are more likely to spend than save. Past observation has shown that because lower-income people often live paycheck to paycheck, they are more likely than the wealthy to spend. Yet “our research suggests that hasn’t been true for the past decade,” says economist Joel Slemrod of the University of Michigan at Ann Arbor. Because the last few tax cuts have followed financial crises, poorer people may have used the extra income to increase their cushion by building up assets or paying down debt. But the rich haven’t been spending freely either. Last year a study by Moody’s Analytics suggested that the 2001 and 2003 tax cuts spurred the wealthy to significantly increase their savings as well.
What should the administration do to design a better economic shot in the arm? One finding on which researchers seem to agree is that consumers respond more vigorously to policies thought to be long-lasting. Therefore, Slemrod says, one farsighted action may plausibly help the economy: convincing the general public that the federal government is committed to getting its fiscal house in order.
This article was originally published with the title Low Taxes, High Rhetoric.
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13 Comments
Add CommentMaybe the poor would be more likely to spend their money if they, you know, had a job. I don't know what's the problem when we have crumbling schools, roads, bridges etc. and people out of work, but we can't agree to get the work done that needs to be done. The Republicans who bellyache about deficits didn't blink an eye when they passed tax cuts, Medicare part D, got us into 2 wars and deregulated the Financial Sector, causing the financial crisis we still find ourselves in. All of these turned a surplus into record deficits, and the only reason they care about the deficit now is because they can blame a Democratic president for their bad policy. The Democrats need to get some courage and get a jobs bill passed!
Reply | Report Abuse | Link to thisUmm... no.
Reply | Report Abuse | Link to thisBoth democrats and republicans need to step back and let capitalism work, of course they won't because they are all to reliant on the CAPITALTISM funds from corporations who want to tilt the playing field in their favor. Personally, I don't think you can blame the corporations because capitalism is all about getting an advantage over the other guy. I can, and do blame the government though. If our elected leaders would stop trying to line their own pockets by taking "under the table" corporate hand outs in exchange for promises to change policies (despite the fact that these changes in policies may run counter to the political views that got them elected), then maybe, just maybe, we would have some leaders who actually represent the public and capitalism might actually function properly. Then maybe if the mid size corporations weren't getting blocked through government policy by the mega-corps, they could get back on their feet and create more jobs.
And I mean, really? A jobs bill? The constitution clearly states that everyone has the right to work, that absolutely does not mean everyone has a right to a job. Where do you think the money to pay for wages under a jobs bill would come from? Taxes and debt, that's where. Personally I think we already have enough of both of those as it is.
Oh, and we need to get rid of the stock market, it's been doing way more harm than good lately.
Reply | Report Abuse | Link to thisWe could have ZERO taxes and it still wont fix the coming hyper-inflation from money printing and the toxic US debt of 14-trillion and climbing. The whole world is going to need to change our way of thinking and doing once the proverbial $hit hits the fan.
Reply | Report Abuse | Link to thisEver hear of a bypass trust? That's where you put your money that is in excess of the exemption from estate and probate taxes and fees. Every single person in the top 1% has one. I guarantee that every penny saved through lowering taxes on the income of the super rich will stay in the bypass trust. NOT A SINGLE JOB WILL BE CREATED.
Reply | Report Abuse | Link to thisEver hear of a bypass trust? That's where you put your money that is in excess of the exemption from estate and probate taxes and fees. Every single person in the top 1% has one. I guarantee that every penny saved through lowering taxes on the income of the super rich will stay in the bypass trust. NOT A SINGLE JOB WILL BE CREATED.
Reply | Report Abuse | Link to thisGiving enormous tax cuts and loopholes to the rich don't help the economy, or the poor, one bit.
Reply | Report Abuse | Link to thisTax income over $200,000 at 55-60%, get rid of the ridiculous loopholes, and governments can get back into a position of being able to pay their bills.
Sure it's not the 90-95% tax rate that existed last century, but it's a start.
Capitalism doesn't work. The closest thing to a capitalist society was Victorian England, and most people lived in absolute poverty. Is that what you're asking for?
Reply | Report Abuse | Link to thisCapitalism may be better than most alternatives, but only when moderated.
Every One of YOU above should ask Yourself, "What is the ONE MOST Important Sentence in your Diatribe and does it Clearly state your Case..
Reply | Report Abuse | Link to thisSecondly, get this into your HEADs once & for all time, Defend the Free Enterprise System with all your Mind, your Body, & your Spirit, & Your VOTE, - for ONLY out of the FREE ENTERPRISE SYSTEM can you, me or "they" EVER become a "Capitalist."
May I simplify this for you: "To Kill the Capitalist, you must first Kill the Free Enterprise System so go now and freely shoot yourself in the Socialist Head, as there will be no loss of thoughtful intelect..
Seriously? You say "capitalism is all about getting an advantage over the other guy" and you still want everyone to "to step back and let capitalism work"? That's more like a good reason to step up and make sure it's properly regulated.
Reply | Report Abuse | Link to thisYou also say "The constitution clearly states that everyone has the right to work, that absolutely does not mean everyone has a right to a job". I'm curious what you would do with people that can't get a job. You obviously don't want to give them one, and I'm pretty sure you wouldn't want them on welfare. What's left, let them starve?
Impressive diatribe. Better watch for those reds under the bed. I must admit, though - I'm not sure what your "important sentence" is, or exactly what you're attempting to say.
Reply | Report Abuse | Link to thisDo you see everything in black and white? Is your sentiment attuned with Bush Jr's "either with us or against us"?
Oh, and one final thing - if you're attempting to appear intelligent, at least get your spelling correct. A few less capitalised words would help as well.
Hi, SciAm-
Reply | Report Abuse | Link to thisYou are wading into an extremely controversial area here, clearly without knowing what you are talking about. The idea that the general public cares or alters its economic activities based on its perception of Federal fiscal "orderliness" is an extreme right wing view, of the Ricardians, Chicago school, Lucas acolytes, and the like (now flogged by FOX and the tea party). They are opposed by the Keynesians, old, new and MMT, (see Paul Krugman) who point out that this view not only makes no theoretical sense, but is empirically disproven.
What your story got right here is that tax cuts do not work to do the stimulatory job we need, certainly not those to the rich. The data on the poor saving their taxes certainly strains credulity, but I will leave that between you and your expert. The clear solution is then not to issue more tax cuts, but for the Federal government to spend money directly to create more jobs and improve ongoing business prospects enough that lending picks up and the economic engine returns to normal.
This is obvious from the data, is consistent with the Keynesian theory that is the whole reason that stimulus spending happens in the first place, and is of course diametrically opposed to the right-wing prescription of fiscal "order".
One more fact for you to chew on- the US has never paid back its debt to any significant extent. It is bonds that constitute private wealth, which is generally not something that anyone wants to redeem, ever, in net terms, as we work our way to greater wealth and savings.
Economy says what it says. Economise on raw materials and recycle them. A growth economy causes ever-increasing ressource depletion and is doomed.
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