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The Benefits of Neutral Tax Treatment of Saving and Consumption

1 min readBy: Stephen J. Entin

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Earlier this week I gave a talk on the economic benefits of fundamental taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform. I’ve included a link to the slides that accompanied my remarks at the July 20th event. Here are some key points:

  1. The income tax falls more heavily on income used for saving than on income used for consumption.
  2. It is important for people to use retirement accounts to offset the tax bias against saving; they yield enormous gains in retirement assets income compared to ordinary saving.
  3. The double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. of corporate income and distributions to shareholder’s results in very high tax rates, which have been made worse in recent years by the 2013 budget deal and the Affordable Care Act tax on investment income.
  4. Estate and gift taxes are additional taxes on capital accumulation that can reach astonishing levels when piled on top of other income and payroll taxes.
  5. The depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. rules in the tax code seriously understate the cost of plant and equipment, resulting in the overstatement of profit and higher tax rates on businesses.
  6. The GDP, and labor and capital income, could be nearly 13 percent higher if these additional layers of tax on capital income and accumulation were repealed, with little long term revenue loss to the government. GDP would be $3.25 trillion higher; there would be 3.1 million additional full-time equivalent jobs, and the long run gains in personal income would be more than $60 for each dollar of revenue loss for the government after all economic adjustments.