Do the Rich Fuel the Economy?

Here is a simple, but I believe reasonably accurate rebuttal of the argument that cutting taxes for the wealthy is good for the economy.  

It is estimated by numerous sources that the wealthy spend about 1/3 of their income and ‘save’ the other 2/3.  The middle and lower classes, on the other hand, spend a much higher percentage of their income.  It is estimated by the LendingClub report that 52-64% of consumers live paycheck to paycheck, spending all of their income.  Moreover, the average personal savings rate, defined as the percentage of disposable income saved, is a meager 3 to 4 percent.

One might think that the rich save a greater percentage of their income because they are paragons of financial virtue, but I doubt that.  I think it is more likely that they simply cannot spend fast enough to get through more than a third of what they earn.  Their income is a combination of wages and investment income, and the old adage 'the rich get richer and the poor get poorer' applies.  The wealthy experience an embarrassment of riches, and even though their spending becomes ever more expansive, the majority of them cannot outspend their ever-increasing income.

 

The top 10% of wage earners apparently account for 50% of consumer spending.  However, that does not mean that decreasing taxes to the rich will benefit the consumer economy (which is about 70% of the GDP) more than decreasing taxes for other groups.  On the contrary, a tax dollar given back to the wealthy will only increase spending by 33 cents, but if allocated either to government projects (infrastructure, etc.) or to the middle or lower classes, it will increase spending by almost the full dollar.

 

It seems perfectly logical that if you want to increase consumer spending, which is the heart of the economy, then it is more effective to allocate funds to lower income citizens.  Similarly, if you want to reduce the deficit, then it would be better to increase taxes for the wealthy, as that would have less of a negative impact on spending.

Conservatives would protest that this does not consider the impact of investment that the wealthy make with the other 2/3 of their income.  But I would argue that there is plenty of wealth out there already for true investment in new companies or innovation.  Most of the so-called investing that the wealthy do on an annual basis is in the stock and bond markets, hedge funds, real estate and other investment vehicles that serves merely to increase asset prices.  

Industry grows due to demand.  Investment in businesses is only effective if the demand for products and services is there.  Putting money in peoples pockets creates demand, and the non-rich spend a lot more of their pocket money than the rich.

 

Critics will argue that taxing the rich is a form of class warfare and is driven by class envy, and that it will damage the economy.  But as Jesus said:  “The rich will always be with you” (oops, maybe that was the poor?). There is no danger of the rich ever disappearing.  But a healthy economy and society are more likely if there is a less absurd disparity between the rich and the rest of the world.