The public and this Committee have long been concerned about the adequacy of saving in the United States, with regard to both the financial well-being of individuals and households and the health of the national economy. The subject takes on added importance as the baby boomers approach retirement with clearly inadequate financial resources. The tax treatment of saving affects the ability and willingness of people to save for emergencies, for education, homebuying, and retirement. The ordinary income tax is heavily biased against saving and in favor of consumption uses of income.
Income is taxed when first earned.
If it is used for consumption, it is free of additional federal income taxes. If it is saved, however, the returns on the saving are taxed again. This is the fundamental bias of the income tax against saving. These multiple layers of tax on saving and capital increase the cost of saving, leading to a smaller stock of capital than would otherwise prevail. A smaller capital stock means lower labor productivity, real wages, employment, and income than could otherwise have been achieved.