Bloomberg has some news that reinforces what many of us suspected…the rich save their tax cuts:

Hand the wealthiest Americans a tax cut and history suggests they will save the money rather than spend it.

Tax cuts in 2001 and 2003 under President George W. Bush were followed by increases in the saving rate among the rich, according to data from Moody’s Analytics Inc. When taxes were raised under Bill Clinton, the saving rate fell.

But tax cuts aren’t the primary driver of rich spending.

What is?

The stock market…

The Moody’s research covering couples earning more than $210,000 found that spending by the wealthy is more likely to be influenced by the ups and downs of the stock market than changes in income-tax rates.

Stock-market performance is the “primary factor that is driving the savings of the top 5 percent of households,” said Mustafa Akcay, economist and co-researcher of the savings data.

And here’s a bit more from the CBO about tax cuts for the rich vs. the lower income brackets…

“Policies that temporarily increased the after-tax income of people who are relatively well off would probably have little effect on their spending because they generally would be able finance their consumption out of their income or assets without such a change,” CBO director Douglas Elmendorf testified to Congress on Feb. 23.

On the other hand, tax relief for families with “lower income, few assets and poor credit would probably” spur spending, he said. Elmendorf said because of job losses and a drop in assets over the past two years more families “probably fit that description now.”

Meanwhile, John Boehner gives up even more ground in this fight and admits that only 3% of small businesses would be affected by not extending the tax cuts.

Long story short, extending tax cuts for the rich right now is not a smart idea. The government needs the revenue now more than ever and with the rick likely just holding on to it anyway, the stimulative effects for giving them more of their money back is probably worse than previously projected.

Moving on…

  • kranky kritter

    The constituency for extending them stretches no farther than the 2% who would get them, so it’s no surprise that Boehner has quickly discovered that his stand is a vote loser.

    I would support ending the break for the richest even if it was merely symbolic. But I was already unconvinced that extending it would spur meaningful growth.

    Besides, even if it were true that really rich people would seek to invest these tax breaks. there is no shortage of capital. Interest rates are super duper low, and there’s been a surplus of capital and a shortage of attractive investments for some time now. That’s a big part of what caused the real estate bubble that crashed the economy in the first place.

    What everyone wants is more attractive investment options, and there aren’t many to be found these days, not at the current level of extreme aversion to risk. Folks are waiting to see a shift back to sound underlying old-school economic principles. Until then, I am more worried about what the next economic bubble will be than I am worried about any scarcity of investor capital because Uncle Sam took a nibble out of the top bracket.

    Anyone else have any candidates for the next bubble? I vote for some subset of commodities. Probably ones crucial for next generation technology.

  • Given that China has drastically cut their exports of rare earth minerals…

  • Chris

    Student loans.

  • JNovak

    At a time when our economy is in dire straits, extending the tax cuts at all doesn’t much sense either. Sure extending them for the wealthy (700 billion) makes zero sense because it doesn’t do anything for the economy but extending the middle-class tax cuts costs a projected 4 trillion dollars.

    What could that kind of money do to reduce the deficit? What if some of it was put into an Apollo type green jobs program and could put 5 million people in the construction industry and related sectors back to work?

    We could energy retrofit every home, public and private building in the country which would also save us billions in energy consumption and reduce greenhouse gases.

    A measly extra $500-1,000 in the pockets of the middle class is not going to have the same kind of effect on the economy investing into infrastructure and green jobs 4T would. They aren’t spending right now either.

  • Charles

    A good indicator of a bubble, Kranky, is when non-investors think it’s easy money. My bet is on gold, which fits your description of crucial for next gen tech.

  • Mike A.

    Agree with Jim, rare earth metals are being used for power cell applications. Besides that, copper is critical for all developing technologies, and has become the key to success for nearly all microelectronics

  • WHQ

    Good news for Afghanistan.

  • Chris

    Good news for halliburton

  • kranky kritter

    Charles, on gold I find myself wondering whether there could be any more big growth in prices given how much it has already gone up. So if there’s a gold bubble, maybe it’s already here instead of being the new one to come.

    I too have noticed the rapid growth in targeting non-investors for gold over the last, what, year?. Personally, I kick myself for not taking Peter Schiff’s advice 2 years ago, when I agreed with him. Now, the run-up seems to be out of steam, but at the same time it doesn’t seem like a bubble that will pop. Economic fear doesn’t seem to be in any jeopardy of running out of steam.

    Anyways, it seems like there’s plenty of overlap among “crucial for next gen tech” “rare earth metals” and “gold.” I guess we should all buy now before they start selling “battery metals futures” on TV infomercials.

  • Aaron

    Well as someone considered to be in the middle class, I have to agree I’m really not spending right now. House costs are expensive.

    ..At least I was able to buy a house! 🙂

    But on a more serious note, as far as taxes for upper and middle class, I’d personally be fine with paying a bit more if I knew it’d help stabilize things. Explosions last week should be indications of the need for continued infrastructure maintenance, and if I have to pay a bit more in April, so be it. As a member of my community, I can accept that.

  • Mike A.

    Interesting to note, many microelectronic devices use gold for different reasons. The two applications I see are to create a solderable surface finish on electronic packages so they can be soldered to the motherboard, and using very fine gold filaments to create wires to interconnect silicon die to the surrounding package. Because of the high cost of gold, and because consumer electronics are so price sensitive, many suppliers have greatly accelerated activities to reduce or totally eliminate gold content. To replace the solderable gold surface finish, people are moving to palladium. To replace the gold filaments, they are moving to copper. Considering this industry builds billions of units every week (not an exaggeration) this could create a surplus of gold on the market resulting in a price drop. The conversion won’t be immediate and will take another 12 to 24 months for these conversions to take place.

  • Chris

    Yeah but isn’t palladium itself a problem mineral coming from conflict countries?

  • Mike A.

    As far as I know, palladium is not on the “conflict mineral” list, but I am no expert. Most of the world’s supply comes from Russia and South Africa.

  • Tillyosu

    Long story short, extending tax cuts for the rich right now is not a smart idea.

    Actually, Justin, most economists disagree with you. In a new CNN poll released today, 60% of economists surveyed said to keep the Bush tax cuts for everyone, while only 10% agreed with Obama’s plan.

    In addition, a new CNBC poll has found that a majority of respondents believe we should keep the tax cuts for everyone, a majority of respondents believe Obama’s policies have made things worse, and a plurality think that more government regulation is bad for the economy.

    The bottom line here is that Obama is losing this argument.