Tax Breaks for the Wealthy Do Boost Economy

Once again, tax policy is playing a central role in the election campaigns across the country. While almost all politicians appear to favor the extension of tax cuts for low- and middle-income households, a political fight has erupted over the fate of the top income tax bracket rate and the tax rate on dividends and capital gains. A host of arguments has been heard--some sensible and some less so. One particularly troubling idea that has emerged is summed up by a recent statement by President Obama, who argued, "These [high-income taxpayers] are folks who are less likely to spend the money, which is why economists don't think tax breaks for the wealthy would do much to boost the economy."

This increasingly popular narrative is based on the troubling implication that the only way to positively impact the economy is through changes in consumer spending. While this simplistic theory would strike any Economics 101 student as preposterous, the behavior of Washington in recent years aligns with this sentiment. It is alarming that the President and so many other politicians in Washington are disparaging saving. But Washington's culture of spending ever-increasing amounts of borrowed funds without any serious strategy to tackle our unsustainable fiscal outlook is reflected in political rhetoric that encourages our middle-class families to spend more, more and more. And the government's extensive web of safety-net programs leaves most families feeling little need to build their own rainy day fund or retirement nest egg. Lost is a culture of thrift, both in Washington and across the households of our country.

Deemphasizing the importance of saving--whether through taxing the returns to saving or through rhetoric that suggests that economic prosperity will result from more consumption--is dangerous.

Saving is not the practice of the wealthy stashing money under plump mattresses. Rather, when we save, we defer consumption to the future, allowing our savings to be invested in productive ways that lead to long-term economic growth. In short, my savings account is your investment fund. Our collective savings are the funds available for investing in stocks, bonds and other securities that allow businesses access to the capital they need to grow. Firms use these funds to start or expand businesses and to buy machinery and other physical capital.

The logic espoused by this spending-cult mentality denies the role of saving, or, at the very least, relegates it to the backseat. It also belittles the virtue of thrift. Future living standards depend in large part on the willingness of the current generation to save for the future. And the willingness of individuals across the income and demographic spectrums to save depends on the value placed on self-reliance and personal responsibility. Deemphasizing the importance of saving--whether through taxing the returns to saving or through rhetoric that suggests that economic prosperity will result from more consumption--is dangerous. Long-term, sustainable economic growth--the kind that comes from businesses and individuals saving, investing, hiring workers and growing businesses--must not be discarded in favor of increased consumer spending.

Because much of the savings that can drive investment and economic growth over time comes from the relatively small fraction of individuals in the top income tax bracket, permitting a tax increase on high-income earners would be a significant disincentive for savings. Our colleague Alan Viard recently cited Internal Revenue Service data for 2007 revealing that households with incomes above $200,000 received 47% of the taxable interest income, 60% of the dividends and a staggering 84% of the net capital gains reported on tax returns.

When Congress returns to Washington for the scheduled lame-duck session they may finally address the looming tax increases scheduled to take effect on Jan. 1, 2011. This decision will affect not only the near-term outlook for the economy but savings and investment decisions for the long-run as well. Consumer spending has its place, but it is not the answer to every economic question. By disparaging investment and in particular the taxpayers who account for most of that investment, Congress is biting the hand that feeds long-run economic growth.

Alex Brill is a research fellow and Chad Hill is a Jacobs Associate at AEI.

Photo Credit:iStockphoto/Brandon Rose

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Alex
Brill
  • Alex Brill is a research fellow at the American Enterprise Institute (AEI), where he studies the impact of tax policy on the US economy as well as the fiscal, economic, and political consequences of tax, budget, health care, retirement security, and trade policies. He also works on health care reform, pharmaceutical spending and drug innovation, and unemployment insurance reform. Brill is the author of a pro-growth proposal to reduce the corporate tax rate to 25 percent, and “The Real Tax Burden: More than Dollars and Cents” (2011), coauthored with Alan D. Viard. He has testified numerous times before Congress on tax policy, labor markets and unemployment insurance, Social Security reform, fiscal stimulus, the manufacturing sector, and biologic drug competition.

    Before joining AEI, Brill served as the policy director and chief economist of the House Ways and Means Committee. Previously, he served on the staff of the White House Council of Economic Advisers. He has also served on the staff of the President's Fiscal Commission (Simpson-Bowles) and the Republican Platform Committee (2008).

    Brill has an M.A. in mathematical finance from Boston University and a B.A. in economics from Tufts University.

  • Phone: 202-862-5931
    Email: alex.brill@aei.org
  • Assistant Info

    Name: Brittany Pineros
    Phone: 202-862-5926
    Email: brittany.pineros@aei.org

 

Chad H.
Hill

What's new on AEI

image The money in banking: Comparing salaries of bank and bank regulatory employees
image What Obama should say about China in Japan
image A key to college success: Involved dads
image China takes the fight to space
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Wednesday, April 23, 2014 | 12:00 p.m. – 1:30 p.m.
Graduation day: How dads’ involvement impacts higher education success

Join a diverse group of panelists — including sociologists, education experts, and students — for a discussion of how public policy and culture can help families lay a firmer foundation for their children’s educational success, and of how the effects of paternal involvement vary by socioeconomic background.

Event Registration is Closed
Thursday, April 24, 2014 | 12:00 p.m. – 1:30 p.m.
Getting it right: A better strategy to defeat al Qaeda

This event will coincide with the release of a new report by AEI’s Mary Habeck, which analyzes why current national security policy is failing to stop the advancement of al Qaeda and its affiliates and what the US can do to develop a successful strategy to defeat this enemy.

Friday, April 25, 2014 | 9:15 a.m. – 1:15 p.m.
Obamacare’s rocky start and uncertain future

During this event, experts with many different views on the ACA will offer their predictions for the future.   

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.