Tag Archives: tax cuts

Look Who’s Not Spending

Tyler Craft notes there is one group that doesn’t spend its tax cuts- the middle class:

Conventional wisdom (something I do generally adhere to) goes like this… if a person makes $20K a year and you give them $100, they will spend all $100 to fulfill basic needs. If you give the same $100 to a person making $80K per year, they will likely save some percent of it. The percent of income saved increases as income increases. This is a very logical argument that is generally accurate.

What happens when a twist is thrown into the premise of the argument? What if a third group is introduced in the middle? The third group, by the original logic, would simply save more than the $20K group but less than the $80K group. However, what if the original two groups have less leveraged balance sheets than this new group? This is the case with the current recession.

Middle class homeowners are leveraged to a breaking point. The rich continue to be rich, and the poor continue to fall just outside of the regular economy. As figures 8 and 9 in the aforementioned research show, stimulus dollars led to increased total spending at a rate of about $.77 per $1.00 by the high group in the study (incomes > about $75K) and at a rate of about $1.28 per $1.00 by the low group (incomes below $32K). The baseline group only increased spending by about 58%. Figure 9 goes on to illustrate the effect of mortgage responsibilities on stimulus spending (this continues in the narrative of figure 8).

Does this mean the middle class should not receive tax cuts because the rich and poor are more effective groups to target? Of course not. In addition to providing some stimulus (the middle class is still spending nearly $.60 per $1.00) from the middle class, tax breaks for this group allow them to deleverage their personal balance sheets so they will emerge from the recession in better financial health than when the recession began.