Tax Cuts: When the ‘Rich’ Get Richer, They Shop

Tax Cuts: When the ‘Rich’ Get Richer, They Shop


President Obama and his economic team have been trying to court economic growth with all the awkwardness of a teenager on his first date. Their pursuit has been uncertain and sometimes self-defeating; they have misread clues and mixed signals, arguably slowing our recovery. The most recent example was Obama’s steadfast resistance to extending the Bush-era tax rates for the so-called wealthy – or more accurately, for families earning more than $250,000. (Plenty of families at the lower end of that scale living in high-cost areas like New York or Los Angeles would hardly consider themselves wealthy.)

Obama’s argument is that any handout for top earners would be wasteful, since people in that category do not spend incremental income, but instead hoard any windfall in their piggy banks. In the fight over the tax bill, this position became an article of faith for liberal economists; an article of faith that has been quickly toppled. 

As it turned out, the wealthy celebrated the prospect of continued low tax rates by delivering a nice surprise under the nation’s Christmas tree – a considerable pop in retail sales. Spending appears to have increased some 5.5 percent for the season – well ahead of forecasts. Upending conventional wisdom at 1600 Pennsylvania Avenue, the surge was led by upper-income shoppers, who spent on average $183 per day in the week ending Dec. 26, up from $126 per day the year before — a gain of 45 percent

Importantly, this jump in holiday largesse came only after the tax extension bill (the bill that maintained low rates for high earners had been passed on Dec. 17). During the week of Dec. 5 spending by the well-heeled was about flat, while in the seven days leading up to Dec. 12, outlays trailed the year-earlier level. It was, in other words, only after they were assured that their taxes were not about to skyrocket that well-off Americans opened their wallets and created a nice economic bounce for the country.

This conclusion is not surprising, except perhaps to economists who don’t get out much. The owner of Maureen’s Passion, a prepared food shop in New York, laughed when I asked him how his sales were running shortly before the holidays. “It all turned around – when the tax bill passed. Caviar! It’s jumping off the shelf!” This fellow’s response was echoed around the country, as sales of luxury goods rose well ahead of forecasts. Jewelry sales rose 8.4 percent, while high-end handbags and clothing were ahead 6.7 percent, for instance. 

Only those more concerned with narrowing the country’s economic divide than with spurring growth could have been blindsided by this outcome. President Obama has been deaf to the notion that individuals, consumers and business leaders alike, need to feel optimistic about their future in order to spend. His attacks on the insurance, banking, oil, coal and pharmaceutical industries, among others, have undermined confidence and held back investment in those sectors. Just as consumer sentiment plummeted during the recession, so did the optimism of CEOs.


Alarmingly, this gauge of business confidence continued to decline in the most recent quarter, even as profits and stock prices rebounded. Corporations are sitting on trillions in cash, awaiting a clearer picture of future demand, but also stymied by concerns that the government is unfriendly to business. Just as harmful regulations have dampened corporate investment, raising taxes on the wealthy would have curtailed spending – just when we need it most.

After all, lower-income Americans are not in a position to prop up the economy. It is precisely that group that is most alarmed about (and most vulnerable to) the continued high level of joblessness. On the ground Gallup Polling shows that unemployment worsened in mid-December to 9.3 percent from 8.8 percent at the end of November. (Gallup’s tally does not track with the federal numbers but is a more accurate reading of the daily marketplace pulse.)

The jump was disheartening, especially since the country had scored gains in the prior few weeks. Also discouraging was that “underemployment” also increased as we approached the Christmas season. Doubtless, those trends contributed to the disappointing slump in consumer sentiment in December – a survey taken mostly before the tax bill passed. 

Lower-income Americans also continue to be constrained by the burdensome credit card and mortgage debt they accumulated in the past decade, and by the continued slide in home values – for many, their major asset. By contrast, wealthier Americans have enjoyed a considerable rebound in stock prices, with the major averages up more than 10 percent during 2010.

With the consumer still accounting for 70 percent of economic activity, we need to spur spending to provide jobs. Boosting exports or developing green industries are terrific programs, but neither will substitute for hiking consumption any time soon. 

Unhappily, the Obama administration has learned nothing from this recent turn of events. Senior advisor Valerie Jarrett has reaffirmed Obama’s commitment to ending the Bush-era tax rates for high earners. “That’s something he’s willing to fight for,” she is quoted as saying. Obama recently said, “I don’t think that over the long run we can afford a series of tax breaks for people who are doing very well and don’t need it.” This comment came ahead of the surprising upsurge in spending, but given the administration’s biases (and enthusiasm for populist rhetoric) it is unlikely this position will change.