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The April data on consumption expenditures left many people, including economics reporters, confused about consumer behavior. The basis of the confusion was a reported decline in the saving rate in April to 4.4%. It had been running over 8.0% in 2021.

However, this reported decline in the saving rate is deceptive. The saving rate is measured as the share of disposable income that is not spent. Disposable income, in turn, is defined as personal income (wages, government transfer payments, interest, dividends, etc.) minus taxes.

The saving rate can fall either because consumption rises rapidly or disposable income falls. It turns out that the story we currently have of a declining saving rate is the latter, disposable income has been rising very slowly.

But the trick here is that the slow growth in disposable income is not due to slow growth in personal income. Rather, the slow growth in disposable income is the result of a big increase in taxes. In April, people paid taxes at an annual rate of $3,089 billion.^[1] This is up by more than 40.0% from the $2,205 billion paid in taxes back in 2019, before the pandemic.

There has been no big increase in tax rates in the last three years, so that would not explain this huge jump in tax collections. The more likely explanation is that people have made large gains in the stock market over this period. They are cashing out some of these gains and paying capital gains taxes on them.

Capital gains income does count as income in the national accounts. This means that when people sell stock at a gain, and then pay income tax on it, we would see this a decline in disposable income. If consumption is unchanged, the GDP accounts would be showing a drop in the saving rate.

There is a simple way to adjust for this problem. We can just look at saving as a percent of personal income, ignoring the amount paid in taxes. If we look at this figure for April of 2022, it comes to 19.2%. That is down from the 19.5% rate for the four years prior to the pandemic, but I’m not sure that drop would warrant a big story about people spending down their savings.