The Tax Laws Should Be Reformed to Encourage Saving Essay Example

to buy stock in a corporation. When the corporation earns a profit from its capital investments, it first pays tax on this profit in the form of the corporate income tax. If the corporation pays out the rest of the profit to the stockholder in the form of dividends, the stockholder pays tax on this income a second time in the form of the individual income tax. This double taxation substantially reduces the return to the stockholder, thereby reducing the incentive to save.

The tax laws again discourage saving if a person wants to leave his accumulated wealth to his children rather than consuming it during his lifetime. Parents can bequeath some money to their children without tax, but if the bequest becomes large, the inheritance tax rate can be as high as 55 percent. To a large extent, concern about national saving is motivated by a desire to ensure economic prosperity for future generations. It is odd; therefore, that the tax laws discourage the most direct way in which one generation can help the next.

In addition to the tax code, many other policies and institutions in our society reduce the incentive for households to save. Some government benefits, such as welfare and Medicaid, are means-tested; that is, the benefits are reduced for those who in the past have been prudent enough to save some of their income. Colleges and universities grant financial aid as a function of the wealth of the students and their parents. Such a policy is like a tax on wealth and, as such, discourages students and parents from saving.