Spending

People Don’t Spend Their Savings, Revisited – OpEd – Eurasia Review

Last month I wrote an article where I managed to mutilate a very simple point. While the reported savings rate fell in April, it was actually due to people paying After taxes on capital gains, not the result of households spending their savings.

The problem here is simple. Savings is defined as the part of disposable income that is not consumed. Savings can fall either because consumption has increased or because disposable income has fallen.

We are not seeing particularly rapid growth in consumption in 2022 (real consumption actually fell in May), but rather we are seeing weak growth in disposable income, which is defined as personal income minus payments of taxes. The story here is not that personal income growth has been weak, but rather that tax payments have soared.

Data for May shows that taxes are paid at an annual rate of $3,123.4 billion (NIPA, Table 2.1, line 26). This represents an increase of 41.6%, compared to the 2,205.1 billion dollars paid in taxes in 2019.

This sharp increase in tax payments cannot be explained by an increase in tax rates. There hasn’t been a major tax increase since 2019. On the contrary, the tax hike almost certainly reflects the large capital gains tax payments people are making on the stocks they’ve sold to the course of the last year. The huge rush in the stock market means that many people would have substantial amounts of taxable earnings.

Capital gains are not considered income. This means, for example, if a person declares $100,000 of capital gains from the sale of stocks and then pays $20,000 of capital gains tax (for high-income people, the rate of capital gains tax is 20%), we will report that their savings are down $20,000.

For most people, it wouldn’t be a story of someone spending their savings. After all, even when they’ve paid their taxes, they can collect $80,000. But in the National Income Accounts, it would show up as a decline in saving.

If we want to see what savings look like excluding the change in tax payments, we can simply combine tax payments and reported savings as a percentage of personal income. (It’s only a useful calculation when there haven’t been any major tax code changes.) Here’s the picture for 2018 and 2019, and the first five months of 2022. (I omit 2020 and 2021 because the data is skewed by large pandemic-related transfer payments.)

Source: Bureau of Economic Analysis and author’s calculations.

It’s hard to tell a story of people dipping into their savings here. The combined rate of tax and savings payments is actually quite a bit higher in the first five months of 2022 than in 2018 or 2019. To be clear, this is aggregate data. There are millions of families who are undoubtedly spending their savings and going into debt.

These calculations simply refer to aggregate data released monthly by the Commerce Department, which had served as the basis for numerous articles claiming that people were spending their savings. This data actually shows that people pay capital gains tax on the money they have earned in the stock market, not on their savings.