Posted by: Josh Lehner | December 18, 2013

Income, Savings and Taxes

One interesting topic that comes up periodically is spending and savings behavior by income level. We know what the overall savings rate in the U.S. is thanks to the BEA (see here) but examining it by income or any other socio-economic characteristics takes further work to derive. One of the more popular sources is an academic study out of Dartmouth from 2004. These are estimated savings rates by wealth (not just current income) based on underlying data from the Survey of Consumer Finance. While this appears to be one of the best or at least most recent studies out there that I know of, it is based on data from the 1980s, back when savings rates were higher overall.


In terms of finding more recent savings behavior, a quick source to turn to is the U.S. Bureau of Labor Statistics’ Consumer Expenditure Survey (CEX). This data shows income level and expenditure level, from which you can back out a savings rate, or as shown below calculate expenditures as a share of income. The pattern is what one would expect, as income rises so too does spending, however at a slower rate. Higher income individuals and households have higher savings rates. What may come as a surprise is that for incomes below about $40,000 – $50,000 per year, expenditures are larger than income. This is one drawback of using this data source because it measures current income and does not take into account benefits or need-based programs that aid lower income households, however it does measure their total spending. Generally these individuals and households are not going into debt, or at least not to this degree, but they are spending all of their current income plus the benefits they receive.


Given this pattern, lower to middle-income households do face higher marginal tax rates as their income increases. In fact, the latest report — A Path to Prosperity — from the Oregon Business Summit the other week included the following graph. This shows that as a family moves from around $20,000 per year to $40,000 or $50,000 per year, they face very high marginal tax rates. The reason for this is that many of the benefits and need-based programs are means tested, so as a family earns more, their benefits are phased out. One can broadly consider this income range from $20,000 to $50,000 as the transition zone, where the purchasing power or spending power for a family does not increase as much as their market based income does, due to the phasing out of benefits.


Tying all this together brings me to the latest report from the U.S. Congressional Budget Office. CBO examines household income, federal taxes paid and benefits/transfers received. The table below summarizes their findings in this regard for comparing income before and after taxes and benefits. The federal tax system, coupled with safety net programs, does result in redistribution, which is how, again, lower income households can spend more than their current levels of market incomes. Over on the New York Times’ Economix blog, Bruce Bartlett has a good summary of this research along with new information from the IRS and Census; I do recommnd it for more information.


In the U.S. and democracies across the globe, there is support for redistribution of income and benefits such that the lower income households are not left in dire straits. The arguments and discussions are around how much is the appropriate level, not whether or not this should occur. I do think most economists are concerned with the impacts of high marginal tax rates in terms of being disincentives to work. Some are just more worried than others and/or assign more importance to taxes on behavior than others. That’s what makes the transition zone tough to navigate, because the spending power for a family earning $30,000 plus benefits is fairly close to one earning $50,000 and no benefits — in this highly stylized example. For upward economic mobility it is important to know that there is a path forward beyond the transition zone. Once a worker is able to make it through — hopefully in a stronger economy with good paying job opportunities out there — these potential disincentives fade away at higher income levels.

Finally, if any of you know of a more recent report on savings behavior, please pass it along! Email me here.


  1. […] View Original: Income, Savings and Taxes […]

  2. […] This work arose during the last legislative session when policymakers were examining the so-called “benefit cliff”. This refers to the fact that many benefit programs are based on an individual, or household, or family’s income. As income goes up, benefits go down. Not all of these programs have perfectly smooth exit paths, although many are close, thus resulting in a drop in overall purchasing power once a particular income threshold is passed. As our office has written previous: […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s


%d bloggers like this: