Did the Wealthy Really Benefit from Tax Cuts?

In today’s NYTimes, Cornell economist Robert Frank suggests that perhaps they didn’t. He argument consists of two primary elements:

1. Since happiness seems to depend more on relative wealth (compared to one’s peers, for example) than absolute wealth, and since all of the wealthy are getting wealthier together thanks to the Bush tax cuts, having more money has not really made the wealthier any happier.
2. The budget deficits that the tax cuts caused have caused a) financial fragility, and b) cuts in government spending on things like medical research, homeland security, and transportation infrastructure. These budget cuts hurt the wealthy disproportionately, simply because they have the most to lose.

I have to say that I disagree. True, the research shows that relative wealth seems to affect people’s well-being more than absolute wealth… but an important component of this is the trajectory of one’s wealth over time. Rising income and wealth makes people happier. And the wealthy in the US have certainly enjoyed rising wealth and income thanks to the Bush tax cuts.

Secondly, it is entirely possible that the tax cuts were large enough that the downsides of budget cuts are small compared to them. The wealthy have the luxury of essentially insuring against such losses, minimizing their impact.

Finally, regarding the possibility of financial crisis: I have yet to see an example of a country where the wealthy suffered more than the middle-class in a financial crisis. Typically, the wealthy have enough resources to safeguard their assets from financial chaos, while the middle-class does not.

So while I would like to believe Frank’s argument, simply because it is so roguishly counter-intuitive, I have to confess that I am not sold. I remain convinced that when the wealthy have lobbied for more tax cuts, they have done so because they are very well aware of their own self-interest. And as they have received tax cut after tax cut over the past 5 years, they have benefited – just as they thought they would.

Kash