We all know, being told it every day by both conservatives and liberals, that over the past several years the American middle class has diminished.  Today’s America, to an extent unlike that seen at any time in the recent past, consists of a relatively small group of people who are quite (or very) wealthy, living very well, and a much larger group who are not wealthy and who have to live very modestly (in may cases within the definition of poverty), with a diminishing number of people, the middle class, between them.

Let us consider an example of this wealthy group; a couple, late fifties or early sixties, both working in high paying managerial or professional jobs or running a successful small business.  They have college graduate children now doing well out on their own. They own a very nice home and also a second summer or winter home, or at least a condominium.  They have three relatively new high end cars, take frequent domestic and foreign vacation, and never look at the prices on the shelves in a grocery store or on the menu of a restaurant.  They have the most up-to-date appliances, consumer electronics and sporting goods.  They buy any clothing they want, again without concern for price.  In spite of this rather profligate life style their net worth is increasing rapidly and they can project that even after retirement, based on their pensions, annuities, stock and bond holding, it will continue to increase even then, perhaps a little more slowly.  Now suppose that there is a change in the tax code next year and they find themselves with an extra $20,000.  Will they buy something extra with it?   No, they already buy whatever they need or want.  Their net worth will however increase a little bit faster.   Suppose they find themselves with $20,000 less next year.  Will they cut back somewhere?   No, they will still buy whatever they want but their net worth will increase by a little bit less.  The bottom line is that for those living well, changes in the tax code in general have no positive or negative effect on their consumption.   It will only change the bottom line in their bank account or their stock or bond portfolio.   With respect to such people tax code changes have neither a stimulating nor depressing effect on the economy.

Now let us consider that same $20,000 given, by a decrease in their taxes, to those in our economy who cannot buy everything they need or want.  They will use that money to buy more or better groceries, go additional times to better restaurants, buy a new or better house, a newer car, additional or better TV’s,  computers, refrigerators, etc.   This will stimulate the economy.  It will create more business, more and better jobs, with more profits for all.  While I do not claim that it is always the case, at this particular time increasing the tax on the wealthy and reducing the tax on the less wealthy, which are much more likely to spend, is a certain direct win for the US economy.

“But you are failing to consider the other important side of the equation”, you say to me.  “That $20,000 in the accounts (bank, stock, or bond) of the wealthy is needed if the economy is to expand to fund business expansion; to build new buildings, to buy new equipment, to do new hires, to increase inventory, etc.”  Not so.  As anyone who listens to the news knows the Federal Reserve has been flooding the economy with cheap money.  Financial institutions and even many businesses are awash in money they don’t know what to do with.  That’s why deposits in banks earn next to nothing, why the bond market is a disaster, and why the stock market is ballooning well beyond any reasonable price performance considerations.  There is far more than enough capital to support business expansion.  What is lacking is enough consumer demand to support such expansion.  No matter how much capital is available no right thinking business man is going to expand his business if there is no demand for his product.  That consumer demand would come from the above described redistribution of the tax burden so that those who are not going to spend have somewhat less and those who are certain to spend have more.  This is not an issue fraught with subtle complexity.