NCPA - National Center for Policy Analysis

Tax Code Biased Against Savings

September 4, 2001

The rate of savings in the U.S. is far too low to meet the retirement needs of the baby boomers. The personal saving rate (saving as a percent of disposable after-tax income) has plunged from about 9 percent since the 1980s to 2.5 percent in 1999. By early 2000, the saving rate was nearly zero. The very low saving rate restricts investment, which in turn retards economic growth. According to the Institute for Policy Innovation, the reason for the decline is the pervasive bias against saving built into almost every aspect of the tax code.

  • Income is taxed when we earn it under the ordinary "broad-based" income tax, and there is no additional federal tax if we spend it for consumption; but if we save the income, we pay at least one other layer of tax on the earnings of the savings.
  • Those who save by purchasing stock in corporations face two additional layers of tax -- levied first on corporate income and then on any dividends from its after-tax income.
  • Social Security recipients face particularly high marginal rates, since benefits are phased into taxable income at a rate of $0.50 or $0.85 for each dollar, boosting the marginal tax rates on wage incomes to 65 percent.
  • The working poor pay income tax plus a 15.3 percent payroll tax on each extra dollar of income, for a combined tax penalty of over 50 percent.

By contrast, a single rate tax, unbiased against saving, with no double taxation of business income and no barriers to investing and saving could add 25 to 30 percent to the stock of capital, raise national income by 10 percent to 15 percent over 15 years, and boost average family income by $4,000 to $6,000 a year.

Source: Stephen J. Entin (Institute for Research on the Economics of Taxation), "Fixing the Saving Problem; How the Tax System Depresses Saving, and What to Do About It," IPI Policy Report No. 156, May 16, 2001, Institute for Policy Innovation.


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