Thursday, June 05, 2008

Tax Consumption, Not Savings

Like philanthropy, saving is an act of self-denial that enriches your neighbors (by leaving more goods available for them to consume). But unlike philanthropy, saving is punished by the tax system (via the taxes on interest, dividends, capital gains and inheritance). That's nuts. When you tax saving, you encourage people – wealthy people in particular – to spend more and grab a larger share of the consumption pie. "More consumption by the rich" should not be among the primary objectives of the tax code.

The alternative is to tax consumption. I and probably most economists believe that a consumption tax is better than an income tax, at least in principle. You can easily implement a consumption tax with a Form 1040 that says: "How much did you earn this year? How much did you save? Now pay tax on the difference." And you can make that tax as progressive as you like.

~Economist Steven Landsburg in today's WSJ


At 6/05/2008 8:14 AM, Blogger spencer said...

For over a quarter century we have followed economist prescriptions to exempt or give special tax breaks to savings in many different forms, including lower taxes on dividends and capital gains.

So what has been the results?

The personal savings rate has fallen to essentially zero.

This has to be an example of one of the greatest failures of economic policy in recorded history.

Why do you keep pushing to continue and repeat this failed policy prescription?

At 6/05/2008 8:58 AM, Anonymous Is said...

Spencer, scroll down and read post entitled "Retirement Assets Increase By $1.1 Trillion in 2007 to Almost $160,000 Per U.S. Household". Do you think "tax breaks" on these types of accounts correlate to their increased use?

I know I have much less in "savings" than in retirement accounts due to the tax benefits of the latter. Are these assets included in the personal savings rate?

At 6/05/2008 9:57 AM, Blogger Bret said...

Savings is not a selfless act. People save because they want to spend later. In other words, they do it for their own advantage.

At 6/05/2008 9:59 AM, Blogger spencer said...

I do not see the article you are referring to.

But yes,IRAs, 401s, and other types of retirement exempt savings are included in the savings number.

For some reason I keep hearing people claim they are not, but the people making this claim are incorrect. What is true is that the capital gains on the savings already in any savings vehicle-- tax exempt or taxable -- are not included in savings. No capital gains are included in savings.

From what I can read of your statement about having more in tax exempt and less in taxable accounts is exactly what I'm talking about. The tax break caused a shift of savings from one account to another, but had little or no impact on total savings.

At 6/05/2008 10:02 AM, Blogger Walt G. said...


A tax deferment is not a tax break. We are all gambling that our tax rates will be lower in our retirement years than during our working years. We are using the past to determine the future. In contrast, the past did not have 78 million aging baby boomers and a $9 trillion national debt. A higher tax rate on affluent and prudent savers—those with the foresight to plan ahead—will be very enticing to our politicians. Our gamble just might not pay off.

At 6/05/2008 10:44 AM, Anonymous Fred said...

OK, Spencer, I understand where you are coming from.

You are coming from Angry Bear where two plus two approaches five for large values of two.

At 6/05/2008 11:32 AM, Blogger spencer said...

So Fred, because I'm on the liberal side, as far as you are concerned I can not be right and you can ignore any facts I quote? Right?

At 6/05/2008 1:22 PM, Anonymous Anonymous said...


1) Capital gains and dividends have not had special tax breaks for 25 years.

2) Why do you want to punish people for success and for saving money?

At 6/05/2008 1:25 PM, Anonymous Is said...

Spencer you say in your first post that the personal savings rate has fallen to zero AND this includes retirement savings which has increased by $1.1 Trillion in 2007. That was the increase not the net value.

At 6/05/2008 2:02 PM, Anonymous Anonymous said...

Mckinsey Global Institute pins the bulk of decline in the US savings rate on the boomers dual reliance on credit and the wealth effect.

Is that a failure of tax policy?

At 6/05/2008 3:57 PM, Blogger spencer said...

is said -- I'm sorry, your comment does not make any sense.

Yes, the overall savings rate is around zero and retirement assets are growing . They are two different things. Savings is a flow and retirement assets are a stock.

The tax rate on dividends and capital gains has been cut repeatedly over the last 25 years. The effective tax rate on capital gains is now two-thirds of what it was in 1990, for example.

The current tax rate on capital gains and dividends is 15% as compared to 39.9% in the mid-1970s,
28% in the early 1990s and 20% in the late 1990s. These rates are well below the income tax rate on income for the upper bracket tax payers.

Don't you guys know anything about what you are spouting.

And Fred accuses me of not being able to add.

Go ahead show me where my facts are wrong.

You are too ignorant to do it.

At 6/05/2008 5:09 PM, Blogger Marko said...

The savings rate is bogus because it is too narrow and does not include how people save no days - such as in stocks, bonds and real estate. Nobody puts their money in the bank because the rates are low and there are no tax breaks like in the other forms of saving. I have seen estimates that the true savings rate (meaning how much money people have socked away for retirement one way or another) has never been higher.

And yes, if you are a liberal, then anything you claim is a fact is highly suspect. Have you not been following the public debate, or living under a rock or something??

At 6/05/2008 6:47 PM, Blogger spencer said...

Com on you guys, I am your economics 101 professor. Your final exam question is simple.

Define savings.

Define wealth.

Explain the difference. Be sure to explain in your definition why the current account deficit must equal the difference between investment
and savings.

Show me that any one of you has any idea what your are talking about.

As far as I can tell all your are doing is repeating talking points you have heard somewhere that you have no understanding of.

marko, people have saved the same for centuries., It has included bonds stocks and real estate for centuries. For bonus points in your final exam explain why it is different today then it was 200 years ago.

P.S. I am a PhD economist with 30 years of experience in bussines economics. Do not try to bull shit a professional.

At 6/05/2008 9:37 PM, Blogger OBloodyHell said...

> Savings is not a selfless act. People save because they want to spend later. In other words, they do it for their own advantage.

That doesn't mean it's any less easier when society encourages it.

And it's not like saving doesn't provide a societal benefit, giving society a good reason to encourage it.

> Why do you want to punish people for success and for saving money?

Emphasis mine. Duh?

> Is that a failure of tax policy?

Uh, yeah?

When there's no benefit to saving, why save? The taxes on any reasonable small-savings (i.e., saving accounts, CDs, anything not carefully found) are sufficient to almost make it useless. The return on savings is little better than inflation and certainly not much better than taxes+inflation. Why save? And for the average user, that would be the only way to go from small-savings to large savings. When you have to have at least 2-5 grand to get any kind of rate of return that is worthwhile, you certainly aren't going to do that unless you have a lot more patience, discipline, and/or extra income than most people.

>> Spencer, scroll down and read post entitled "Retirement Assets Increase By $1.1 Trillion in 2007 to Almost $160,000 Per U.S. Household".

To which Spencer replies:
> I do not see the article you are referring to.

OK, I call JACKASS!!!

I did a "find" on '160' and this came up instantly, as of today, 6/5/2008:

It's official, Spencer: You're a complete jackass.

If you can't be bothered to even look at answers when you're spoonfed them, then you're an idiot training hard to be a moron... and failing

At 6/05/2008 11:54 PM, Blogger happyjuggler0 said...


I often disagree with spencer, and we have different normative biases. But he raises good points about flawed arguments all the time.

Calling names is no way to have a mutually profitable discussion. The poster who said "scroll down" is the one at fault. Talk about lazy, he could've scrolled down himself and included a link.


Assuming some sort of EMH belief on the part of investors/savers, and assuming their investment returns on their savings are growing at a much higher rate recently (the past 25 year or so) than previously (the 15 years or so before that), isn't it plausible they'll simply decide to save less since they feel they are ahead of the game?

Under that logic, why not spend more of one's income and enjoy some life now with your relatively recent investment "bonus"?

At 6/06/2008 2:34 AM, Blogger OBloodyHell said...

> Calling names is no way to have a mutually profitable discussion

I reject the notion that there can be a mutually profitable discussion with someone who cannot be bothered to even look at data when he's specifically told about it.

I specifically pointed that out.

It's not like it was work to find it, it took me all of five seconds to find the entry being referred to, and to copy the link into the post.

HE couldn't be bothered. He didn't want to hear it, didn't want to see it, didn't want to argue it.

It utterly undermined his point so it didn't exist.

Seen too much of that from liberal twits where economics and such are concerned (and, lest you think I think conservatives are perfect, they're just as bad on self-euthanasia and abortion in discussions...) not to call a spade a spade.

If he's as honest in debate as you imagine, then hopefully, he'll figure out that someone is going to see if he's being (at best) preposterously, inexcusably lazy, and avoid it next time.

I suspect you're granting him more credit than he really deserves, but I won't rule it out as a possibility.

I get really, really tired of arguing the same points over and over again with liberal idiot after liberal idiot who can't be bothered to actually learn anything whatsoever about the topic they're discussing and who then ignore every resource which would refute their positions when it's handed right up for them to observe.

I've noticed a couple of those here, trotting out hoary old arguments that you could find adequate examples refuting them if you did a search on just a few obvious terms on any search engine on the net -- a lot of the counterarguments can be found HERE on the blog, again, if only they were actually looking. They aren't

That said individuals claim to be unaware of the arguments says they are either lying or ignorant without valid justification for such.

And when they manage, like spencer, to be blatant about it, I'm going to reserve the right to call them on it, and be rude about it. They've been disrespectful to everyone else here by ignoring the data served right up on a gold platter for them to consider.

People who do that are generally not looking to learn or convince, but to waste peoples' time trying to make them write out an explanation for something already proven or demonstrated a thousand times in a thousand different places.


At 6/06/2008 6:33 AM, Anonymous Anonymous said...

Uh, yeah?

Would you kindly share your Kool-aid with us obloodyhell. The Mortgage Bankers Association reports that 1 in 11 mortgaged homes is now delinquent 30 days or in foreclosure.

The Federal Reserve reports that household net worth:

1. has declined for 2 quarters in a row and is back to 2006 levels;

2. as a percentage of disposable personal income, net worth has retraced back to 2003 levels;

3. Homeowner equity as a percentage of real estate is at all time lows.

And savings are almost useless to pay a mortgage or ride out a balance sheet contraction. Who is the jackass [emphasis mine] again?

At 6/06/2008 7:13 AM, Blogger spencer said...

happy jugler you are completely right. Thank you.

If a lower tax rate gives you a greater after tax return on your savings you can do one of two things.

One, you can save more. That is the argument that started this discussion. We need to cut taxes to cause more savings.

Two, because you have a greater return you are closer to your savings goal and you can save less.

The data is overwhelming that over the last quarter century that the second option is what has happened and you correctly pointed it out.

You and I are in agreement on the facts that over the last quarter century lower tax rates has lead to lower savings. The position of Carpe Diem that lower tax rates leads to greater savings has been disproven.

the rest of the arguments advanced in this posting are just pain wrong and represent ignorance.

What ever your name is. I made a serious effort to find the article you keep discussing. I could not find it. provide a link or shut up.


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