Since consumers are saving, scrap the tax cut

Posted Feb 2nd 2009 12:48PM by Peter Cohan
Filed under: Microsoft (MSFT), Economic Data, Politics, Recession, Financial Crisis

Something like $275 billion of the proposed $900 billion stimulus plan is reserved for tax cuts. But the tax cuts will just add to the $1.2 trillion dollar deficit with little effect on consumer spending. The reason? Consumers generally save most of the money they get from tax cuts. But the latest savings rate statistics suggest that consumers are now saving on steroids. So I say, scrap the tax cuts.

Things have really changed in the last few years when it comes to savings. In 2007, consumers were spending more than they were making -- just as they did in 1929. To be specific, the savings rate was negative at -0.7% in 2007. Those were the days that consumers could get by on their stagnant incomes by borrowing to buy those flat screen TVs and snowmobiles.

But then the credit markets dried up and the stock market crashed so consumers found out that the only way to get by was on the money they had coming in the door. The result? The December savings rate hit 3.6% -- the highest since May 2008 when savings were boosted by tax-rebate checks. And if you adjust for one-time events -- such as those tax rebates, 2004's $75 billion Microsoft Corp. (NASDAQ: MSFT) special dividend, and the 9/11 terror attacks -- that 3.6% is the highest savings rate since 1999.

Such savings are good for consumers but bad for the economy. If the savings rate was zero, consumers would be spending $400 billion, accounting for 3% of GDP. In fact, consumer spending fell 1% in December 2008 -- capping the worst year for consumer spending in the last 47. So if the goal is to satisfy legislators who want tax cuts, let's have the tax cuts.

But if the goal is to stimulate economic growth, the $275 billion in tax cuts will just boost the savings rate even higher and won't add a whit to GDP growth. Let's scrap the tax cuts and use the money for my colleague's plan to fix the financial mess.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in Microsoft securities.

Tags: featured, stimulus plan, StimulusPlan, tax cuts, TaxCuts

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Reader Comments (Page 1 of 1)

2-02-2009 @ 12:59PM

Iridium said...

We need extensive tax cuts. The consumer needs as much money as possible. All we have seen with our tax dollars is massive government spending for nothing.

The government doesn't deserve taxpayer money. The federal government takes enough money from my middle class income every year to pay for a mortage on a $150,000 house.

Massive tax cuts are the only way to stimulate the economy. You have to give people more money, either through wage raises or tax cuts.

2-02-2009 @ 1:01PM

Iridium said...

I would also add that your friends plan is one of the worst plans possible to help fix the mess.

2-02-2009 @ 1:30PM

chris said...

I'd like a tax cut but it won't necessarily make me want to spend. I like the Hyundai Assurance Program. If you buy the product and get laid off then they will let you return it without ruining your credit. I wish consumer products could be done the same way. Like right now I would like to buy a new Canon camera. It's expensive but no way I'm pulling money out of savings or trying to borrow to get it because I may need that money if I get laid off. I realize there is a world of difference between a 30K auto and the effects on the economy and the 2K camera. But the same principal of simply not buying is there. And if needed a new car you can bet I'd be looking real hard at a Hyundai now. Anyway, even with a tax cut I'd still be paranoid about losing my job and would just continue to save.

2-02-2009 @ 2:01PM

BHarrison said...

So, where are "consumers saving anything"? Having been prudent enough to live a modest lifestyle, having paid for my home and vehicles, and having no indebtedness, how does that equate to "my saving anything" when I've suffered a $25K to $30K loss in my conservative investments?

It is not that "consumers are saving anything", they are merely financially devastated due to having been defrauded by the FIs, the corporations, and the markets/funds. The consumers don't have the descretionary income to spend because they have been DEFRAUDED.

Then, there is NO INTEGRITY in the financial reports of the corporations, therefore, there is no faith and confidence in the corporations or the markets/funds in a declining market that is still manipulated and corrupt to the core.

Some of these "savings" are merely the monies being transferred from "investments" to savings accounts as people cash out of the market . . . and it probably represents a loss to those individuals.

Congress has yet to issue prudent and reasonable regulations or implement effective oversight to begin to INSTILL INTEGRITY in the markets and funds.

Isn't it odd how anything can be "twisted" to suit anyone's perspective?

2-02-2009 @ 2:08PM

BHarrison said...

Iridium said...

You have to give people more money, either through wage raises or tax cuts.

==== > That doesn't do anything to help those MILLIONS of Americans who have become unemployed, does it?

Meanwhile Congress has done NOTHING to address the "ill gotten monies" during the last decade by the CEOs, Boards of Directors, and uppermanagent who have obscenely benefitted from the FRAUDS that they orchestrated and perpetuated. Nine out of ten of the CEOS in these corporations are still running these corporations; isn't this CRIMINAL? Why hasn't Congress done anything to address these problems.