Should the tax laws be reformed to encourage saving(pro and con) Essay

Should the tax laws be reformed to encourage saving(pro and con) - Essay Example When similar activities are subjected to different tax treatments, households and businesses respond to the tax code rather than the underlying economic fundamentals. Economic efficiency is increased by broadening of the tax base and lowering of the tax rates. The costs of distortions caused by high tax rates will be reduced. These are approximately proportional to the square of the tax rate. Also, a simpler tax code would reduce the considerable resources which are presently devoted to complying with current tax laws; and the freed-up resources could be used for more productive purposes. Another important principle is that some predictability in the tax code would facilitate better forward-looking economic decision-making by households and businesses. (Greenspan, Allan: Chairman 2005) The tax code includes many incentives intended to increase savings to finance retirement, health care, higher education, and so on. These savings incentives, which exempt some income from tax, have moved the current tax system in the direction of a consumption base. Researchers have raised questions about how much if any, net new savings they stimulate. (21st Century Challenges†¦p.73). If designing a tax system from scratch, one based on consumption rather than income, would be better for promoting economic growth. A consumtion tax is likely to encourage saving and capital formation. The retail sales tax, value added taxes, the personal consumption tax and the flat tax are all types of consumption taxes. They vary in their collection points and structure. In future it will become increasingly important for the nation to boost resources available, through greater national saving and enhanced incentives for participation in the labor force. The tax system has the potential to con tribute importantly to those goals, and so at the very least tax reform should not hinder the achievement of those objectives. Importantly, fundamental, thorough tax reform include difficult choices