Go ahead – spend now, save later

By John Cunniff The Associated Press
Tuesday August 14, 2001

As the economy weakens, the word is being spread to consumers from all directions, including Washington and the business community: If you care about the economy get out and spend. 

Spend now, save later. Spend your tax rebate. Your help is needed. 

All perhaps understandable in the short term, since reluctance to spend might hasten a recession, but it is strikingly at odds with another imperative. 

The latter, very much in the news only months ago, is that the consumer must save. Savings will be needed, consumers were warned, for tuition, medical care, retirement and, yes, for economic growth. You can’t blame consumers for thinking they’re being torn in different directions. 

The ironies are many. For one, were they not taxed the funds that are now being rebated, they might have been able to save more for the future. And now that they are urged to spend, they will, of course, be taxed again. 

They will be taxed at the gasoline pump. They will pay sales taxes at the local retailer. They will pay taxes on the interest earned in savings accounts. And on dividends earned, even though dividends may already have been taxed at the corporate level (and passed on in consumer prices). 

While these taxes may help pay the cost of running government, and might help the economy in the short term, they do little to resolve the long-term problem of low savings, a condition that is growing worse. Earlier this year, with the savings rate barely above zero, a study by the Employee Benefit Research Institute found fewer Americans saving for retirement, and fewer even able to determine what they’ll need. 

First, income taxes are levied when earned. Though already taxed, what’s put away may be taxed as interest on savings. If invested in companies (that have already paid corporate taxes), the dividends earned might be taxed. When sold, taxes may be owed on stocks. And in the end, there may be estate taxes. Amid all this, of course, may be sales taxes. 

Whatever the reasons, and whether for the short term, such as finding a way out of the slump — or the longer term, such as saving for the future — there exists a serious economic dilemma. 

The most optimistic outcome, one based in a sort of Rube Goldberg conception, is that consumer spending will jump-start the economy into growth, enabling people to earn more, and then save more for the future. 

In short, there could be a happy ending. But short-term or long-term, you can be sure that taxes will play a role, significant and perpetual. 

John Cunniff is a business analyst  

for The Associated Press