What is Wrong With the Current Tax System?
An ideal tax code would be completely neutral–it would neither encourage nor discourage any type of activity. (Of course, perfect neutrality is impossible to achieve because taxes necessarily affect individuals’ decisions by distorting relative prices in the economy.) The current tax code seriously violates the principle of neutrality by favoring current consumption relative to saving (i.e., future consumption). The disparity between the treatment of current consumption and saving occurs because the existing tax system is primarily an “income-based” system. The problem arises because the definition of income used to define the tax base generally includes both saving and the income earned from saving (i.e., interest, dividends, etc.). Thus income that is saved is taxed at two different levels. This double taxation raises the price of saving relative to the price of consumption. For instance, consider a worker who receives a $2,000 bonus at work and is deciding between using the funds t
