Spenders vs. Savers

Arnold Kling has an interesting thought experiment over at his new digs:

Suppose that Lois Lender and Sammy Spender work at identical jobs, earning identical incomes. However, Sammy spends all his earnings, while Lois saves 20 percent of hers. Do you think that Lois should pay more in taxes than Sammy, as happens when we treat interest, dividends, and capital gains as income?

I find a few flaws in the answers he gives but I think it’s an interesting question nonetheless and provides a bit of insight into the national conversation.

61 comments… add one
  • sam

    That is an interesting question. But can someone explain to me the logical distinction between investing the stock market and betting at a casino (where you winnings are fully taxed according to Topic 419 – Gambling Income and Losses

  • sam

    test

  • jan

    The article may be simplistic, but it also reflects accuracy in traits and perspectives of the three political philosophies listed.

    Taking it a step further, when the social progressive POV becomes the ‘law of the land,’ I think a lingering question in a conservative’s mind might be, “Why am I deferring gratification anymore, in lieu of having to give away what I worked for and saved?”

    Consequently, I think ‘savers’ and ‘workers’ may find their motivation edge somewhat dulled, as they fall more into step with the spenders and the ‘sit-on-your-posteriors’ crowd, who are the main beneficiaries of the social progressive ideology — an evolved mentality of, “If you can’t beat them, join them.” After all this experiment was already tried in the early days of William Bradford, except in a reversed order timeline.

  • steve

    1) Sammy spends all of his money, but some is spent starting a small consulting company. The money received from this business is income, so he pays income tax rates. Lois puts her money in a mutual fund and never looks at it. She pays capital gains rates on her earnings. Why should she pay taxes at a lower rate?

    2) Lois is foregoing current consumption in the hopes of larger amounts of future consumption. She is hoping, one assumes, that her lifetime consumption will be larger than Sammy by investing. Is this a social good we want to encourage? Since we have chosen to tax income, at what price? Is there a downside to excessive savings and inadequate consumption? (Where is China w/o the US?)

    3) I dont think Kling’s example happens very often. What we really have is a large group of people who need to spend all of their earnings to survive. We have a middle group who can save, but not enough to cover their future retirement or, barring luck, result in significant wealth. We have a third group with lots of disposable income. They are likely to invest, looking for returns on that investment to provide them even larger consumption in the future, or more funds for more investment. Is their utility in lowering rates, or eliminating them, to encourage an activity they would likely engage in anyway?

    Steve

  • Is it better to have an Amazon card vs. depositing your change after every transaction? That’s what my husband did.

  • Save $250 every year that way.

  • He wanted to save quarters. I undertsand now.

  • He called it “vanity”, but in the whole morass, I needed some thing for myself.

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  • hELL, i NEED AN EDITOR BADLY.

  • Drew

    steve

    More correctly, current income he pulls out of the business over time is taxed as ordinary income. However when, and if, sammy sells his business the gain above and beyond his tax basis in the capital account is taxed at cap gains rates. Same as if sammy started a widget maker. Same if sammy was a private equity fund owner.

    The lower taxable rate on appreciated capital is designed to encourage capital formation and employment in business growth. If the rates go up materially you are going to witness why this isn’t sticking it to the man, but sticking it up The Average Joes you know what.

  • But that still doesn’t get an answer to my question, Drew.

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    Could’ve gone ’round the bend.

  • In the next installment, Catherine and Michael, we explore weaponry.

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  • steve

    “The lower taxable rate on appreciated capital is designed to encourage capital formation and employment in business growth.”

    But it didnt work in the 2000s. If someone is making 2 million a year, and they want to make 4 million a year, are they not going to invest because cap gains rates are 20% instead of 15%? They will just sit on cash?

    Steve

  • Hell, I’ve been around for ten years, at least.

  • 30 to 20 was the breaking point for my FIL, steve.

  • Get below that and people thinks that money grows on trees.

  • That’s what we call a “bubble”. Where ya’ll come from?

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  • 1) Sammy spends all of his money, but some is spent starting a small consulting company.

    In other words, it is an investment.

    She is hoping, one assumes, that her lifetime consumption will be larger than Sammy by investing.

    Kind of like what Sammy is doing in 1.

    I think you are confused steve.

  • Drew

    steve

    it always works. measuring it with all the other variables at play, and with the absence of a control group at a certain rate makes it well near impossible to measure like a scientific experiment in a lab.

    Thats why I always speak about the importance of observing the real life behaivor investors, as i do.

    dont forget that investment pricing is primarily calculated as discounted cash flows. the discount rate is really risk. cash flows are, well, projected cash flows. if someone reduced cash flows in a model by changing the profitability/earnings assumption of, say, a stock or private enterprise, no one would even blink an eye at the notion that asset pricing would go down. but because of all the politics swirling around taxes there is a refusal to acknowledge that reduced cash flow through that mechanism will have the very same effect. remember, with a five pct increase in the cap gains tax rate and 4 pct for the obamacare tax, thats a 9/15 or 60% increase in the tax rate. lastly, i would note that one way to reduce taxable income and the tax rate hike is to increase the proportion of financing by debt and its tax deductible interest. can you say unintended consequences?

  • He has a right to be. He actually works for a living.

  • That’s to Steve V.

  • Most of the talking these days is academic blather.

  • I can blather with the best of them, and more to the point.

  • If you take capital gains too low, it releases a lot “ambitious” money, without anything to back it up. The investments become bad, like speculative housing.

  • The loan rate should be higher.

  • “Investment” means something.

  • Drew “invests”.

  • I’m not so sure about Romney.

  • My husband wanted me to see $100,000 out of the condominium. That won’t happen.

  • Ethics are screwed.

  • How’s that, Uncle Dave?

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  • How’s the plumbing going, TB?

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