Tax man cometh.

The recent refusal to cut taxes and raise revenues had me consider three things. First I will lay out an example:

The median income of a family in America (4 people), roughly, is $50,000. Lets for simplicity purposes say that an effective 2.5% tax-cut is passed and is only for those making less than $10 million versus tax cuts for all income brackets. A 2.5% tax-cut at the $10 million level is $250,000. If we take that 2.5% tax cut ($250,000) we can give an additional 10% ($5000) tax cut to 50 families (a family = 4 people) or 200 people. (I realize I am slightly altering the tax cut to give a larger tax cut to those making $50,000)

But my real question is how much more is behavior going to be impacted for someone at the $10 million dollar level with an extra $250,000? Is that person going to spend it all or spend some and save some?

What about that family that got the extra $5,000? In my opinion the family is more likely going to spend that money than the millionaire.

A recent study by Moody's Analytics found that food stamps (for the most impoverished) increases economic activity by $1.73 for every dollar spent. Unemployment insurance improved by $1.62 for every dollar spent and most other types of tax-cuts is less than $1 dollar of economic activity. Clearly, those on the bottom of the economic pyramid seems to spend more and save less. (Source: Economist- July 16th 2011)

The argument on the behalf of those making $10 million is that they are a job growth creator. But why isn't the person making $50,000 also a job growth creator? That family may go on vacation, but clothes, or fix that broken dishwasher.

Moreover, there is a key difference between giving a tax-cut to an individual making $10 million and a business that is grossing revenues above $10 million. In my opinion, the two often get mixed up when we hear politicians get on their soap boxes. I am all for giving tax breaks to our businesses and improving the regulatory environment. However, I am less convinced that the propensity to spend and stimulate the economy does not diminish (as higher income brackets save more) when we rise up the income ladder.

On another level, a more philosophical one, is the $250k tax cut given to the person (or even family of 4) making $10 million going to impact 200 people? Is buying that exotic watch or car (most likely foreign made) going to improve our economy? From a strictly utilitarian perspective spreading out those tax cuts is more useful in my opinion.

Lastly- giving tax cuts is effective only if it is spent in a productive manner. What if that person making $10 million puts $50,000 into a mutual fund that invests in stocks? Or what if that person uses it to put a downpayment on their third house? Is there any consideration that this may cause asset bubbles (i.e. too much cash chasing too few houses and overvaluing stocks?)

In fact, historically, Americans in the top income brackets were taxed as high as 70%. The money was used to build our roads and improve our infrastructure. These days our infrastructure is rotting because there is not enough money in our government's coffers.

But then again my whole analysis (light on rigorous empirical detail) might be biased in that I am not making $10 million.