NCPA - National Center for Policy Analysis

Tax Breaks for the Wealthy Do Boost Economy

November 2, 2010

A political fight has erupted over the fate of the top income tax bracket rate and the tax rate on dividends and capital gains, say Alex Brill, a research fellow, and Chad Hill, a Jacobs Associate, at the American Enterprise Institute.  

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."

However, 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.  

  • 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.
  • Alan Viard of the American Enterprise Institute recently cited Internal Revenue Service data for 2007 revealing that households with incomes above $200,000 received 47 percent of the taxable interest income, 60 percent of the dividends and a staggering 84 percent of the net capital gains reported on tax returns.

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, say Brill and Hill.

Source: Alex Brill and Chad Hill, "Tax Breaks for the Wealthy Do Boost Economy," Forbes, October 27, 2010.

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