That’s why tax cuts for the rich have a much smaller impact: the rich allocate a much smaller fraction of their income to buying goods and services.
First, let me clarify that I should have written this:
That’s why tax cuts for the rich have a much smaller impact: the rich allocate a much smaller fraction of increases to their income to buying goods and services.
However, in a recent Ezra Klein column, Klein’s main researcher finds both research backing up this statement and research denying it. He thinks the case against it may be stronger.
On the other hand, he said that shortly before a new study was released showing that the spending habits of the rich are determined more by changes in in the stock market than by changes in tax rates.
Where does that leave us? Well, we cannot with complete confidence say that the rich would spend a smaller fraction of their tax cut than the poor, though there’s a good case to be made for the claim.
Luckily, though, we do have some direct empirical evidence comparing different types of stimulus. Klein’s researcher directs readers to a recent “Bang for the Buck” analysis of various types of stimulus, summarizing it like this:
The pattern is striking: Direct government spending — through unemployment benefits, food stamps, work sharing or infrastructure spending — top the list, giving you more than a dollar’s worth of stimulus for a dollar’s worth of spending, while cuts to taxes affecting businesses and upper-income individuals — such as the corporate, dividend, capital gains and alternative minimum taxes — give you less.
And here’s the chart from that analysis:
Economics is a frustrating field because it’s impossible to conduct controlled experiments (We’ll take 300 identical nations, implement one policy in 100 of them, another policy in another hundred, and make no policy change in the last hundred…). That’s why so much effort goes into collecting, analyzing, and reanalyzing data. If any of you know of other good studies like this (whether they support or contradict these findings), go ahead and note them in the comments.