What do rich people do with their tax cuts?

The big debate over continuing the Bush tax cuts has been about the very wealthy, those making more than $250,000. Should they get a break?

Well, what would they do with it?

There's evidence that they will save a good part of it.

Tax cuts in 2001 and 2003 under President George W. Bush were followed by increases in the saving rate among the rich, according to data from Moody’s Analytics Inc. When taxes were raised under Bill Clinton, the saving rate fell.

The Moody’s economists examined saving rates by income groups back to 1989. Their study uses statistics from the Federal Reserve’s quarterly Flow of Funds report, which gauges the net worth of households, and the Fed’s triennial Survey of Consumer Finances, a measure of balance sheets, pensions and incomes of U.S. families.

When tax legislation was signed by Clinton in 1993 -- raising the top tax rate to 39.6 percent from 31 percent -- the saving rate fell from 12.1 percent in the second quarter to 9.5 percent in the first quarter of 1994. The Standard & Poor’s 500 Index rose 1.9 percent from July through September, after little change the previous three months.

When the first Bush tax cuts were signed into law in June 2001, pushing the top rate down to 35 percent, the wealthy boosted savings. The saving rate climbed to 2.8 percent in the first quarter of 2002 from minus 2 percent in the second quarter of 2001. The increased savings coincided with a 1.1 percent decline in the S&P 500 index.

After the second round of Bush tax cuts in May 2003, the rich also increased their saving, with the rate climbing to 7.6 percent in the first quarter of 2004 from 2.2 percent in the second quarter of 2003, the Moody’s data show.

So if they save, they aren't stuffing the money in a mattress. They're buying stocks and bonds and real estate, all of which keep the money circulating in the economy. (See below.) Good. I'd rather they make the decisions on where the money goes than the government. The politicians, of course, would rather have the money to spend it on their constituents, those they think will vote for them next time.

One thing you and I have in common with rich people is how we spend our money. For all of us, housing is the biggie. A recent study from the U.S. Bureau of Labor Statistics found that, regardless of income-level, Americans' single biggest expense is housing, across all income levels. 

Poorest 20%: 37.9% of total spending
Middle 20%: 32.8%
Richest 20%: 30.4%

What else can we say about the rich and their money? Liz Pulliam Weston, a personal finance columnist for MSN Money and author of the question-and-answer column "Money Talk," which appears in newspapers throughout the country, has compiled some numbers.

They give away more. Charitable giving dropped sharply among the wealthy after the 2000-2001 bear market, according to Spectrem Group. Still, households with $500,000 or more in investible assets gave away 6% of their incomes in 2004, and those with net worth of $5 million, excluding primary residences, contributed 6.1% of their incomes. That compares to an average of about 2% for all American households and 4% for households with incomes under $25,000, according to American Demographics.

They are much more likely to own businesses. Overall, about 12% of American families own all or part of a privately held business, according to the Federal Reserve, compared to 41% of those whose net worth puts them in the top 10% of households. Business assets comprise 21% of the total net worth of households who have $500,000 or more in investible assets.

Maybe one of them will have your next job.

Most of their wealth is investments:

• 46% in stocks and bonds, managed accounts, IRAs, mutual funds, deposits and alternative investments
• 10% in pensions and defined-contribution plans like 401(k)s
• 6% in insurance and annuities

All of those houses and businesses and investments will be taxed. Demagogue about the rich all you like, but I'm wishing them good luck.