NCPA - National Center for Policy Analysis

The Role Of Taxes In Savings' Decline

September 7, 2000

Two years ago, the government announced that Americans' personal savings entered negative territory for the first time in the postwar era. But after a major revision of the data last October, the savings rate was revised upward more than three percentage points -- wiping out the deficit.

Now the rate has once again entered the red zone, with no prospect of a revision to bail it out. Economists point the finger at higher taxes -- both income and payroll. Simply put, after paying their taxes, Americans have less and less left available to set aside.

  • As more and more Americans have moved into higher tax brackets and paid taxes on capital gains from the rising stock market, the average tax rate rose from 17 percent of personal income in 1995 to close to 19 percent in 1998.
  • To be sure, higher spending levels have also played a part -- the increase in consumption has exceeded the gain in disposable income by some $216 billion over the past two years.
  • Experts conclude that Americans have become dependent on high stock-market and property values to fund both current consumption and future retirement.

That's fine so long as wealth stays high -- but a decline in either stock prices or real estate values would likely force cutbacks in spending and increase the need to boost savings.

Source: Michael J. Mandel, "What Bush Vs. Gore Means for Empty Piggy Banks," Business Week, September 11, 2000.


Browse more articles on Economic Issues