NCPA - National Center for Policy Analysis

Taxes Squander Savings

November 19, 1998

Americans are experiencing the longest sustained increase in real hourly earnings since the 1960s, while at the same time savings rates are declining, debt levels are up and there is a record number of bankruptcies. But analysts say there is a simple explanation for this contradictory set of circumstances: taxes.

Since 1993, because of bracket creep and the elimination of deductions, tax payments are up. Since consumers continue to spend the same share of pretax income they always have, what suffers is savings.

Analysts note consumers can do three things with their income: save it, spend it or pay taxes. The Commerce Department figures the savings rates by first subtracting taxes from income, then subtracting consumption from what is left. This makes it appear that consumption as a share of income is rising, but it isn't.

  • The problem is corrected by comparing spending patterns with overall personal income, rather than after-tax income.
  • Since September 1993, despite a boom in personal wealth, consumption expenditures have grown at a 5.44 percent annual rate.
  • During the same period, personal income grew at a 5.38 annual rate.
  • Consequently, consumption grew only from 81.6 percent of personal income in September 1993 to 81.9 percent in September 1998.

With consumption stable and savings rates declining, there's only one explanation left: taxes are rising faster than income. During the past five years, federal, state and local income, estate, property, capital gains and excise taxes have grown at an annualized rate of 9.9 percent.

  • These taxes represented 12.6 percent of personal income in September 1993.
  • They were up to 15.6 percent by September 1998.
  • As a result, personal saving fell from a positive $194 billion to a negative $12 billion.
  • At the same time, the federal budget went from a $255 billion deficit to a $70 billion surplus.

Now, however, with the economy cooling and savings rate falling, analysts believe a tax cut should be a primary goal of Congress.

Source: Brian S. Wesbury, "The Tax Man Is Stealing Our Savings," Wall Street Journal, November 19, 1998.


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