March 5, 2013 at 11:10 AM ET
Despite higher tax bills this year, the richest Americans will keep spending. If a pullback in savings continues over the long term, however, some economists say an unexpected consequence could be the erosion of investment capital.
The top income tax rate is now 39.6 percent, and the top 1 percent of households will pay, on average, 35.5 percent in combined income and other federal taxes on income of $1.4 million, according to the Tax Policy Center, a research group.
"I think the way taxes are going up on the wealthy, it’s probably for the foreseeable future," said Maury Harris, UBS managing director and chief U.S. economist.
In a recent report, Harris wrote, “[T]ax increases on the affluent... should not have much negative consumption impacts as the affluent trim their savings.”
For now, this is good news — it's better to keep the wealthy spending their money, Karen Dynan, a senior fellow at the Brookings Institution, said via email. "One of the reasons that the economy hasn’t recovered more quickly from the Great Recession is that consumer demand has been weak."
If companies see spending or confidence nosedive, they'll retrench at the expense of the labor market, she said. "If businesses come to doubt that people will keep spending, they’ll be even more reluctant to hire than they already are."
Conventional wisdom would suggest that more consumer spending always is good for the economy, but Harris said this sustained spending, especially by the richest households, comes at an expense. “It’s not like this money was being stuffed under a pillow,” he said. “In the longer run, the consequence is that you’re reducing the amount of seed money in the economy.”
As of 2004, the top 1 percent of earners socked away a little more than half their income, money that was funneled into the stock market, private equity, real estate and a host of other investment vehicles.
One reason the affluent save so much is because they want a cushion against volatility or years when their portfolios could go into the red, said Jonathan Skinner, professor of economics at Dartmouth University. "Others may want to prepare for retirement... Still others may be accumulating assets in a company so that they can continue to control the company," he said via email.
Skinner suggests a shortfall in investment by the 1 percent could be countered by a surge of investment from overseas. "This decline in new domestic savings could, however, be offset by foreign [investors] seeking a higher return in the U.S.," he said.
Harris concedes that a pullback in savings and investment by the wealthy won't cause short-term pain in capital markets. "For the time being, there's plenty of investment capital," he said, thanks to loose monetary policy and a relaxation of bank lending standards.
But over the long term, Harris said tax policy needs to encourage savings rather than spending to fuel the economic engine of capital markets.
Dynan agreed, pointing out that countries where people save more have higher rates of business investment. "Higher investment is associated with stronger productivity growth. If wealthier Americans were to pull back on saving, it could hurt the productive capacity of our economy," she said.