On January 1, 2011 a small percentage of American households (under 2%) became the beneficiaries of a windfall they could not have anticipated two years ago. And a subset of that small 2% - those whose taxable income exceeds $500,000 did not know as late as the beginning of December that they would have such good fortune.
The extension of “the Bush tax cuts” as they are called had bipartisan support and its stated purpose was to stimulate economic growth by keeping money in the private sector of the economy. That sounds like and in fact is perfectly logical economic theory. If that money is spent, it acts as an immediate stimulus to growth; if it is invested or saved, it will produce the same result over a longer period of time.
The greatest economic concern in the U.S. at the moment is the high rate of unemployment. We all know that the “official” rate of 9.8% understates significantly the numbers of those who can and want to work. We are not used to high unemployment; it has always been the problem of other countries and now we are in its grip.
For those in the very highest income bracket in this country, the extended tax cuts truly are a windfall.
They would not have been any less affluent had the tax breaks expired on December 31; their lifestyles would have been unaffected.
Meanwhile across the country there are hundreds and even thousands of not-for-profit organizations which serve a broad array of needs and interests of the population at large. They look after the homeless; they visit the homebound elderly; they make and serve food in soup kitchens; they provide joy and entertainment through music, dance and art. The economic stress of the last two years has reduced the funding they count on from both the private and the public sector. Many of them have already shut their doors and many more are barely clinging to life. If they cannot survive, not only will their needed services be lost, but their employees will join the ranks of the unemployed. For them the extension of the tax cuts does not provide any direct benefit - except through the largesse of the beneficiaries of the tax cuts.
And with that in mind, I propose a New Year’s resolution for those who find themselves in the enviable position of receiving money they don’t need:
Take your newfound income – that 3.5% of every thousand dollars over whatever level of income you need, and put it immediately and directly into the economy by donating it to charities that assist others with acute needs. In that way it will reach those who will spend it now; it will keep others from becoming unemployed; it will indeed stimulate the economy directly, rather than through the slow trickle down which is of marginal or no benefit to them. The benefit is immediate and three-fold: to you the donor as a deduction, to the organization which can survive to another month or year helping those in need and to the needy themselves whose desperation is relieved by your thoughtfulness.
Happy New Year!
Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.