The Corner

Tax Hikers Senselessly Stuck on Saving

Tax-hike advocates have erected yet another straw man to protect their high-tax policy, now arguing that little economic harm would be done if Congress and the president were to raise taxes on higher earners because these high-tax sufferers would have saved the money anyway. Yet the issue is not saving vs. consumption; the issue is incentives, as Robert Barro points out in today’s Wall Street Journal.

Of course, the tax hikers prefer to talk in terms of whether tax cuts for the wealthy would help the economy. But we’re not talking about tax cuts. No cuts are on the table, unfortunately. The issue at the moment is whether taxes go up.

This fixation on saving vs. consumption is a diversion, and worse than a diversion. It’s a diversion because it shifts the debate from what really matters, which is that higher tax rates on work, entrepreneurship, and creating jobs will produce less work, less entrepreneurship, and fewer jobs. It’s worse because it falsely demonizes saving.

Many years ago, worried people stuffed their savings into mattresses, sewed $20 bills into the lining of their clothing, and buried cans of cash in their backyards. Times are tough now, but I haven’t seen any stories about this sort of thing lately. Those stories date to the 1930s. Today, rich and poor alike put their savings into the financial system, safely behind protective walls like FDIC insurance.

Why does this matter? Because saving has become in the minds of many economically dangerous — and all because of a dead economic theory. John Maynard Keynes developed his theory of recessions and depressions almost 100 years ago, when worried savers burying cash really could hurt an economy. Today, savers have cause to worry about the future and about the economy, but not about the safety of their deposits.

If those who can do so choose to save more, this adds to national saving, which is the pool from which national investment flows. Liberals love to talk about the importance of investment for the future. Well, to invest for the future, you have to save today. That means those who can and want to save should not be discouraged from doing so through higher taxes on investment income and capital gains.

Nor is saving harmful to the present economy. Liberals have been so anxious to heap heavy new regulatory burdens on our financial system that they have forgotten that the purpose of the system is to channel saving into productive uses. The financial system exists to channel savings from savers to investors. And while the credit system is still healing, meaning the allocation of capital may not be ideal, it does not mean financial institutions are just sitting on saving. Money never sleeps.

Thanks to a robust and, from the depositor’s perspective, secure financial system, saving does not just drop out of the economy as it once did. Some saving finances someone else’s consumption, and some of it is absorbed into financing Obama’s massive deficits. But much of it goes into national investment, often displacing foreign saving that would otherwise have to be imported.

Debating whether the wealthy save more or less is very important for the long run. But it’s utterly irrelevant to the economy in the short run. The tax hikers pursue this line to deflect attention from what really matters — namely, the damaging way the Obama tax hikes would distort incentives.

J. D. Foster is the Norman B. Ture senior fellow in the economics of fiscal policy at the Heritage Foundation.


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