NCPA - National Center for Policy Analysis

Blame Taxes For Low Savings Rates

August 5, 1998

Some politicians and economists chastise Americans for not saving more of their income. Last year, the savings rate fell to 2.1 percent -- the lowest level since the depression of the 1930s.

But Commerce Department officials point out that in considering savings, one must also consider personal income, taxes and spending.

  • Last year, Americans earned $6.8 trillion -- $1.1 trillion more than they spent.
  • Of the surplus, taxes consumed $989 billion -- leaving just $121 billion in net savings, or 2.1 percent of disposable income.
  • Experts pin the blame for low savings squarely on increasing taxes -- which soared 58 percent from 1990 to 1997.
  • On the other hand, spending over that period increased only 43 percent.

Other countries have high tax rates, but their citizens still manage to save more than Americans do (see figure). Economists say that is because countries like Germany, France, Britain and Italy -- whose citizens save anywhere from nearly 11 percent to over 13 percent of their disposable income -- tax long-term capital gains or dividends at rates much lower than those of the U.S.

Then there is the fact that the equity Americans have in their homes is not included in savings figures. Including homes, the average American had a net worth last year of $125,000.

Finally, official savings rates no longer include capital gains pay-outs by mutual funds, analysts point out.

Source: Perspective, "Taxing Savings," Investor's Business Daily, August 5, 1998.

 

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