High Marginal Tax Rates on Saving Hurt Us All

Bush’s Incremental Reform

The personal saving rate in the United States is alarmingly low.  The average person saved about nine percent of his disposable (after-tax) personal income in the mid-1980’s, about five percent in the mid-90’s, but only about two percent so far this decade.  These very low rates of saving restrict investment, which, in turn, considerably retards the growth of productivity, wages, and employment and slows the growth of individual income and wealth.

Why is the saving rate so low?  In a word: taxes.  Income is taxed when it is earned.  If you use after-tax income to buy food, clothing, or a television, you can generally eat, stay warm, and enjoy the entertainment with no additional federal tax (except for a few federal excise taxes).  If you buy a bond or stock or invest in a small business with that same income, however, you pay income taxes on the stream of interest, dividends, profits, or capital gains received (which is a tax on the “enjoyment” that you “buy” when you save).  This added layer of tax is the basic income-tax bias against saving.  If your saving is in corporate stock, the business also has to pay the corporate tax before distributing dividends to you or reinvesting earnings to increase the value of the business.  Either way, corporate income is taxed twice.  If you leave your loved ones a modest bequest at death (beyond an...

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