US Consumption and Tax Policy

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Some interesting bits.

Supports my contention that we are seeing real wealth flowing upward and will continue to do so.

Note the distribution of consumption, which has been moving north as well.

Proposed tax policy won’t change any of this- higher incomes will more than offset increased marginal tax rates for the top tax brackets, and consumption will increase.

And yes, an economy can work via aggregate demand coming predominately from the top, with the bottom at subsistence levels. And we are moving in that direction.

Interestingly, as this happens the wealthy are considered ‘good’ when they hire hundreds of service people to take care of their homes, boats, personal fitness, and entertaining, etc. as they are ‘providing jobs.’

This also fits well with the export economy model our leaders are pushing hard to achieve. And the trade numbers are looking like they are succeeding. Notice the trade gap narrowing as standards of living fall.

Interesting research from ML-BAS highlighting the importance of the tax policy debate for US consumption growth and consequently US GDP:

US Consumption (Currently 72% of GDP)

  • Outlook for consumption depends on consumer outlook—on disposable income, wealth, and credit quality.
  • Wealthy (top 10% of earners) have a surprisingly high share of consumption (42%) with the middle class (40-90 percentile) composing 46% of consumption.

The US consumer as a whole is not overleveraged—the middle class is.

  • 200% debt to income and 25% debt to assets ratios are substantially higher than the wealthy’s corresponding ratios of approx. 120% and 8% respectively.

Housing wealth has a bigger impact on consumption than stock market wealth.

Wealthy have weathered the last two years a lot better than the middle class:

  • Retained employment much better.
  • Suffered lower wealth losses
  • Substantially less proportion of assets in housing.


  • Overleveraged middle class burdened by real estate losses will not help consumption rebound.
  • Lower income segment has a relatively small proportion of income, suffers from a disproportionate share of unemployment which lags GDP out of a recession.
  • Wealthy –with modest leverage, near full employment, and experiencing a faster rebound in their wealth should lead consumption if all else stays the same.
  • However, reliance on government borrowing has increased as a result of addressing the credit crisis as well as the potentially ambitious health care reform bill.
  • Rising taxes (especially the “soak the rich” policies that are on the table) may offset potential consumption growth as the most important determinant of consumption is after tax income.
  • The outlook for tax policy on the top earners may provide a key swing factor to the consumption outlook.