Wednesday

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 9 The Real Economy in the Long Run
Chapter 26 of 36 Saving, Investment, and the Financial System
Section 19 of 25
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Three government policies that affect the economy's saving and investment:
Policy 1: saving incentives
Policy 2: investment incentives
Policy 3: government budget deficits and surpluses
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Policy 1: saving incentives
Americans save a smaller percent of their incomes than people in many other countries, such as Japan and Germany.
Many U.S. policymakers consider the low level of U.S. saving to be a problem.
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Restated from Chapter 1, the Ten Principles of Economics:
1: people face trade-offs
2: the cost of something is what you give up to get it
3: rational people think at the margin
4: people respond to incentives
5: trade can make everyone better off
6: markets are usually a good way to organize economic activity
7: governments can sometimes improve market outcomes
8: a country's standard of living depends on its ability to produce goods and services
9: prices rise when the government issues too much money
10: society faces a short-run trade-off between inflation and unemployment
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One of the Ten Principles of Economics, #8, is a country's standard of living depends on its ability to produce goods and services.
Saving is an important long-run determinant of the productivity of a nation.
If the U.S. could raise its saving rate the growth rate of GDP would increase, because of increased investment.
In the long run U.S. citizens would have a higher standard of living.
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Another of the Ten Principles, #4, is people respond to incentives.
Many economists have invoked this principle to suggest the low saving rate in the United States is partly attributable to tax laws that discourage saving.
The U.S. federal government and many state governments collect revenue by taxing income including taxes on interest and dividend income.
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Consider a 25-year-old who saves $1,000 and invests it in a 30-year bond earning 9% annual interest, with all interest reinvested.
If there are no taxes on the investment returns, the original $1,000 grows to $13,268 by age 55 through compound interest (the initial $1,000 plus $12,268 in accumulated investment gains).
If the 9% interest income is taxed each year at a 33% rate, the effective after-tax return falls to about 6%.
Under those conditions, the same $1,000 grows to only $5,744 by age 55.
Taxes on interest income reduce the long-term growth of savings, lowering the future payoff from investing and thereby reducing the incentive to save.
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To remedy this problem of saving disincentivized by taxes many economists and lawmakers have proposed reforming the tax code to encourage greater saving.
One proposal to incentivize more saving is increase amounts that can be put in Individual Retirement Accounts.
IRAs allow people to shelter their saving from taxation until retired when their income, therefore income tax rate, is lower.
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reform the tax code
zei kōdo o kaikaku suru
税コードを改革する
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What are savings rates and amounts saved by income decile in U.S.
See attached Table A.