Question

Assume a bill of legislation is proposed such that all retirement contributions are taxed at the regular individual income tax rates. What effects would such a bill have if it becomes law, have on a: savings rate, b: tax revenue, c: short-term state of the economy, and d: social security burden for the government in the long run? What do you think about such a law?

Would it be good/bad for a country like the US?

Answer 1

a]

the savings rate would decrease because there is less incentive for individuals to save.

b]

The tax revenue would increase since the contributions which were subject to low/zero tax are now taxed at regular rates.

c]

In the short-term the economy would grow due to higher fiscal spending from higher tax revenue.

d]

The social security burden would increase because the population has lesser savings to fund themselves.

Such a law is not good because savings translate into higher investment for the economy, which is required for long-term growth.