Sample Economic Essay Paper on Saving Incentives in the Tax Code

A tax incentive is a facet of a country’s tax code designed to entice a particular economic activity.

What are the major savings incentives in our tax code?

Comprehensive consumption taxation

One of the efficient methods of providing a saving tax incentive is to convert the current individual income tax into an individual consumption tax. The nature of such an expenditure tax should be made clear. Generally, the base of the tax, which could be taxed at progressive rates, would be household consumption, defined as income minus saving.

Indexation for inflation of all capital income

Indexation for inflation of all capital income means that all depreciation deductions would be attuned for increases in the price level, that take place after the purchase of the asset that depreciates. Real capital gains would be subject to taxation and the component of interest income or expense that is free, would be subtracted or added from the tax base (Galper and Steuerle 6).

Broader-Base, Lower-Rate Income Tax

The broader, lower-rate income tax adoption is a traditional approach to tax reform. A broader base would offer a more uniform treatment of capital income from dissimilar sources, thereby improving the allocation of resources. Lower tax rates would reinforce the tendency toward effective allocation, by decreasing the value of tax preferred assets relative to other assets automatically, even if some assets continued to receive tax preferences.

In what ways are the savings incentives in our tax code poorly designed if our goal is to encourage saving among low- and moderate-income households?

The majority of welfares from savings tax preferences go to households of upper income, not because they have more income to possibly save, but for the reason that higher tax bracket households on the margin achieve greater reductions in their tax liabilities for each tax deductible dollar. Furthermore, the complex rules associated with some of the tax incentives make it impossible for households who are less financially adept to use them. As demonstrated by research, many homes do not understand financial matters, and are likely to make financial errors and have challenges planning (Dynan 2).

Why do so few filers take advantage of the Saver’s Credit?

Most tax filers fail to qualify for the credit as a result of lack of federal income tax liability against which the saver’s credit can be applied. Moreover, the present structure of the savings is inefficient since the set up creates a mismatch between need and subsidies because the largest subsidies go to the most affluent. In addition, the structure does not efficiently promote net savings since taxpayers with higher income with savings, are more likely to be able to shift the assets that exist in the subsidy’s response (Southworth  and Gist 1).

What can you do personally to increase your retirement income?

Providing for one’s retirement needs determination, hard work and dedication as Kandziolka (13), asserts. Most of the retirement decisions are influenced by personal wealth, which includes accumulating wealth in the 20s or 30s, since saving will be a lot less and the earnings will have time to compound. In addition, minimizing one’s taxes that can take a substantial portion of the portfolio earnings can also be used to increase the retirement income. Strategies for tax avoidance and tax deferral on the investment income should be used. For instance, keeping money in tax advantaged accounts and contributing to the traditional IRA (Munnell, Golub-Sass and Webb).



Works Cited

Dyan, K. Proposal 6: Better Ways to Promote Saving through the Tax System. The Brookings Institution. 2013.

Galper, H & Steuerle, E. Tax Incentives for Saving. 1983.

Kandziolka, C. Personal Wealth Management and Retirement. Murin Publishing LLC 12 Tinc Road Flanders. NJ 07836. 2012.

Munnell, A.H, Golub-Sass, F & Webb, A. How much to save for a Secure Retirement. Center for Retirement Research. 2013.

Southworth, Lisa & Gist, John. The Saver’s Credit: What does it do for savings? AARP Public Policy Institute. 2008.