If Bush-era tax-bracket reductions disappear, so will bank
deposits, according to Market Rate Insight.
Bank deposits will fall by $200 billion for each 1% increase in
the ratio between tax and personal income. In August, the national
ratio was 9.23%. In June 2001, prior to President Bush's tax cuts,
the ratio was 14.76%. A return to that level would mean banks would
collectively lose more than $1 trillion in deposits, putting an
additional strain on economic recovery. As of September, banks'
deposits totaled $7.6 trillion, according to MRI.
"At a time when the idea is to encourage lending, it's
counterintuitive to reduce the deposits upon which institutions
lend," said Dan Geller, executive vice president at MRI in San
It isn't just rich folk who will feel the pinch-tax brackets'
return to pre-2001 levels would affect everyone. "If tax cuts
aren't extended, people will need to take money out of their
deposits to pay higher taxes," Geller explained.
The Bush cuts accounted for a 42% variance in deposits, or in
other words, 42% of the subsequent gain in deposits can be
attributed to the 2001 tax cuts, Geller said. Other factors include
interest rates on deposits and inflation. "The message is very
simple," said Geller. "If tax cuts are not extended banks should
expect a reduction in deposits starting in the first quarter of
The best advice for advisors' clients is to keep some money
liquid in order to pay the potential increase in taxes, either in a
short-term CD or a money-market fund. "Don't lock in money because
people don't know what their tax liability is going to be," Geller
said. "Keeping some assets liquid until January is advisable."
It's still possible that Congress will vote to retain the
current tax levels, but Congress isn't obligated to do anything. If
it does nothing, Bush's tax cuts will expire Dec. 31 at