Rich Are More Sensitive to Tax Increases Today, Zandi says

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http://blogs.wsj.com/wealth/2010/08/27/rich-are-more-sensitive-to-tax-increases-today-zandi-says/

It also may be economically unwise. Some of the most well-reasoned and factual arguments about the Obama tax increases have come from Mark Zandi, chief economist with Moody’s Analytics.

In a presentation at a Democratic issues conference in California this month, Mr. Zandi–who has advised both Democrats and Republicans–said he supports a one-year extension on the Bush tax cuts for the wealthy, with the cuts phased out starting in 2012.

He says that in normal times, cutting taxes on the wealthy doesn’t stimulate the economy much, since the wealthy tend to save more.

But today is different.

“Normally, I would firmly agree that raising taxes on people who make over $250,000 a year would not make a meaningful difference in the way they spend money. But I worry that these aren’t normal times and that even this income group may be sensitive,” Zandi said.

Why are they sensitive? Let us recall the data Mr. Zandi crunched for the Wealth Report earlier this month. It showed that the top 5% of Americans by income account for 37% of all consumer outlays. Outlays include consumer spending, interest payments on installment debt and transfer payments. That is nearly equal to the outlays of the bottom 80% of Americans.

The research also showed that the wealthy had negative savings rates in recent months, meaning they were spending more than they were earning.

So we have an economy that is over-reliant on the over-spending of the rich. That isn’t a sustainable growth model for any country in any period. But for now, it is all we’ve got. And a tax increase could reduce what little spending we have in the economy.