Other countries have high tax rates, but their citizens still manage to save more of their hard-earned dollars than most Americans. Economists say that this is because many other countries provide a tax incentive for small savers by exempting some portion or all of their interest or dividend income from tax. In contrast, the U.S. tax code taxes the savings twice, once when the individual earns the income, and again when the small savers earn interest or dividends generated by the savings or investments. Congress can not place the blame entirely on the American consumer for our nation's record low savings rates. Our current tax code discourages savings and investment.
Income is taxed first when it is earned.
If the income is spent, then it is not taxed again. However, if the income is saved or invested, the returns on the savings are taxed once again. Thus, savings and investment are taxed twice. The multiple layers of taxation on savings increase the cost of savings, which leads to a smaller supply of capital, and a decreased personal savings rate. A fairer tax code would not penalize savings relative to consumption.