IPI Publication Press Release
IPI Policy Report - # 156
Related Publication Title:
FIXING THE SAVING PROBLEM
How the Tax System Depresses Saving, and What to Do About It
Released by Sonia Hoffman on 07/26/2001
IPI Policy Report - # 156
Related Publication Title:
FIXING THE SAVING PROBLEM
How the Tax System Depresses Saving, and What to Do About It
Released by Sonia Hoffman on 07/26/2001
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Press Release (07/26/2001)
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Tax System to Blame for Near- Zero Saving Rate
FOR IMMEDIATE RELEASE
Thursday, July 26, 2001
Contact: Sonia Hoffman, (972) 874.5139 or shoffman@ipi.org
Dallas, TX: The personal saving rate plunged to nearly zero in 2000. Americans who annually saved an average of 9 percent of their income as recently as the mid-1980s don’t save at all today. That’s frightening, especially considering the future insolvency of Social Security and the fact that over 70 million Baby Boomers are quickly approaching retirement.
Why has the saving rate taken a nose-dive? In one word: taxes.
“The level of income could be at least 10 to 15 percent higher than it is today, if current tax biases did not exist,” says Steve Entin, president of the Institute for Research on the Economics of Taxation and author of “Fixing the Saving Problem,” the first study in the Institute for Policy Innovation’s “Road Map to Tax Reform” series. “Families could receive an average of $4,000 to $6,000 more per year in income, causing the saving rate to skyrocket.”
The Bad News: Biases against saving lurk in the structures of the progressive income tax, the corporate profits tax, the estate and gift tax, Social Security, and the Earned Income Tax Credit.
For example, under the ordinary "broad-based" income tax, income is taxed when it’s earned. If someone uses their income to buy a tennis racquet or a television set, very little additional outlays need to be made (excluding state sales tax).
But if the income is saved, taxes also must be paid on the earnings of the savings. For instance, if you buy a bond, you pay taxes on the interest; if you buy stocks, you pay taxes on the dividends.
Additionally, the U.S. system imposes a corporate income tax on corporate earnings — not only on shareholders' dividends and capital gains — and applies an estate and gift tax to accumulated savings.
The Good News: These tax biases can be eliminated. Extending a tax deferral to all saving and then taxing the withdrawals (the saving-deferred approach), or taxing the income that is saved but not the returns (the returns-exempt approach) would be a good starting place.
In fact, each of the major tax reform plans, including the Flat Tax, the National Sales Tax, and the USA Tax, uses one of these approaches to create a fairer tax system that is less biased toward saving.
Continues Entin: “We need to reform this inequitable, inefficient, and unproductive tax system — now. A single rate tax, unbiased against saving, with no double taxation of business income, no tax on estates, and no barriers to working, investing, and saving by the working poor or retirees is essential for the future of America.”
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