This is a post from The Wall Street Journal (http://online.wsj.com) where they used several of the AARC tracking studies to support their reasons for extending the Bush tax cuts.
Prozac for the Rich: The Bush Tax Cuts Should Be Extended, If Only to Avoid Withdrawal
Originally posted August 26, 2010
http://online.wsj.com/article/SB10001424052748703632304575451663295635780.html
Pity the rich. They are a fragile bunch.
Give them a sunny economic outlook and there’s no vacation home they won’t buy. Hint that the economy is in the tank and threaten a tax increase, and they’ll hoard and panic like a squirrel in an October snow.
Witness the trepidation of Blackstone Group LP co-founder Stephen Schwarzman. Asked about potential new taxes for the private-equity industry, Mr. Schwarzman lost a little perspective. A “war,” he called it. “It’s like when Hitler invaded Poland in 1939.”
Not everyone who’s affluent shares Mr. Schwarzman’s level of alarm, but the reality of our economic situation has as much to do with our psychology as it does with the raw numbers. And even the numbers point to extending the Bush tax cuts, at least until the economy is back on its feet.
Sure, there’s economic disparity. Yes, the deficit is a lingering issue. Certainly, the economic benefit of cutting taxes is debatable.
But as much as it irks our sense of fairness, the rich have the power when it comes to stimulating the economy. The affluent not only sit on a load of disposable income, they are decision makers in the corporate world. They’re the ones who have piled up cash in their companies, fearing the worst during the last three years. They’re the ones who have resisted hiring.
Did I mention the affluent are fragile?
They scare easily. Even before the financial crisis hit and the markets swooned, the richest Americans were cutting back. A survey by the American Affluence Research Center in early 2008 found that 55% of wealthy Americans, those earning more than $315,600 annually, were cutting spending.
Those results became progressively worse with each new survey the center conducted.
In its most recent poll this spring, respondents had negative ratings on business conditions and personal-income growth. A majority of respondents planned to hold spending at current levels, and one in four said they would cut spending.
Remember, the center conducted this study when economic data was at least mixed—not amid the steady parade of dire jobs, housing and trade data we’ve recently had to digest.
Tax Therapy
In many ways, the influence of the affluent is unchanged from the Great Depression. Then, “the economy was dependent on a high level of investment or a high level of consumer luxury spending or both,” wrote John Kenneth Galbraith in his book, “The Great Crash.”
“The rich cannot buy great quantities of bread,” Mr. Galbraith wrote. “If they are to dispose of what they receive it must be luxuries or by way of investments in new plants or projects.”
The stock-market crash, he argues, sent the affluent into a panic that helped fuel the depression. Mr. Galbraith wasn’t a proponent of trickle-down economics, but he acknowledged the importance of confidence among the rich and how it translates into the economy.
Though conditions may not be as dire today as they were then, they are perilously close. We are worried about a double dip, deflation and a myriad of potential terrors. But for all of these the prescription is clear: We need to get more money flowing into the economy.
Would extending the Bush tax cuts to the wealthy do that? No. But they would give the affluent one less horror about which to worry. For those of Mr. Schwarzman’s ilk, it would be akin to calling off the invasion.
Forget the debate about what economic impact the cuts had or have on the economy.
The reality is that despite the deficit, borrowing costs for the government are the lowest in history. Throwing $1 trillion at the problem during the next 10 years by eliminating the tax cuts for the wealthy is a long-term goal, but one that would be better tackled when the economy is growing. Low borrowing costs make the deficit a back-burner issue.
Stimulating private spending—or at least not curtailing it—is a short-term and necessary step. We’re talking about the fragile psyche of the affluent here.
Enacted in 2003, the tax cuts may have been Prozac for a sufferer who merely had a bad day. Seven years later, they’ve become dependent on them. Given the way things are, there couldn’t be a worse time for the patients to go off their meds.
Write to David Weidner at david.weidner@dowjones.com