There’s the ordinary political obstacle, of course: People are already outraged about the effect the Federal Reserve’s zero interest rate policy is having on savings income. Actually penalizing savings is a political non-starter.
But this isn’t just a case of political obstacles to good policy. Ygelsias’s policy wouldn’t work even if it could be attempted. In the first place, it’s not at all clear that taxing savings reduces savings. I know it’s standard economist thinking to say that if you tax something, you get less of it. But saving is different.
People do not save out of a fetish for money. They save so that they will be able to spend in the future. Why save to spend in the future? Perhaps you plan to purchase something extraordinarily expensive, beyond the means of your income. So you need income to accumulate to make the purchase.
Or perhaps you anticipate a fall in your income, either because you worry about losing your job or you are planning on retiring. So you spend less of your income now to preserve it for spending later.
Now, let’s say that we’re in a cashless economy with a 10 percent savings tax. If I set aside $1000 this year, it will be worth just $900 next year. Do I save less or more? If I don’t think I’ll need $1000 next year, perhaps I decide to spend that money. But if my financial planning requires me to have $1000 next year, I actually have to save more. In this case, I set aside $1100.
There’s certainly some point at which my desire to save could be overcome with taxation. If you taxed my savings at 100 percent, I’d stop doing it. But I imagine the savings tax rate could go well above 50 percent before it totally overcame the desire to save more against the higher tax rate.
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