Economists have long believed that tax cuts help stimulate the economy by encouraging spending, but a new study shows that the rich tend not to spend their tax savings.
Moody’s found that the savings rate among rich Americans actually went up after the Bush tax cuts of 2001 and 2003, and had previously gone down when the tax rate rose under President Bill Clinton. The data suggest that rich Americans are inclined to put away any extra money they gain from tax cuts (which is probably how they got rich in the first place).
The study has particular relevance as Congress debates whether to extend the Bush-era tax cuts that are set to expire at the end of the year. While a compromise plan would extend the cuts for all but those making more than $250,000, most Republicans favor keeping the tax cuts across the board, citing their importance for economic recovery. Even as House Minority Leader John Boehner (R-Ohio) struck a conciliatory tone, Senate Minority Leader Mitch McConnell (R-Ky.) remarked, “only in Washington could someone propose a tax hike as an antidote to a recession.”
The Moody’s study is unlikely to sway the debate one way or another. While Democrats will likely trumpet the finding that slashing taxes for the wealthy will have little impact on economic recovery, Republicans can just as easily point out that driving down saving among the rich will hurt economic growth by discouraging investment and job creation. Indeed, McConnell argued that raising taxes on small business owners would hinder recovery.
“Now they want to drive another nail in the coffin – a massive tax hike on the very people who will dig us out of this recession by expanding their businesses and creating jobs,” McConnell said of the Democrats’ plan.