Taxes, Saving, and Macroeconomics

By Buchanan, Neil H. | Journal of Economic Issues, March 1999 | Go to article overview

Taxes, Saving, and Macroeconomics


Buchanan, Neil H., Journal of Economic Issues


[To institute tax incentives] on the assumption that they will have commensurate effects in increasing investment must . . . rest essentially on faith. Faith is indeed sometimes rewarded. But for our part, in this instance, we remain agnostic.

- Robert Chirinko and Robert Eisner, 1983

Proposals for tax reform have been part of the American political landscape for as long as there have been taxes. However, with the Republican party majority having taken over both houses of Congress in 1995, a serious political movement arose to reform the tax system in a much more radical way by "tearing the current system out by its roots," in the words of U.S. Representative Bill Archer. The general idea is that we should replace the current income tax-based system with one of a variety of systems intended to raise the U.S. economy's long-term growth rate through encouragement of saving. Saving, it is claimed, leads to higher investment, productivity, international competitiveness, and long-term economic growth.

As radical as the political rhetoric has been, the basic economic reasoning behind these plans is anything but new. Neoclassical economists have been calling for ways to increase saving for decades. Even 50 years ago, James Tobin [1949] could reasonably describe such efforts as having "a long history." Moreover, politicians have taken this advice to heart. While the United States, along with every other industrialized country, continues to use an income tax system, inducements to saving have always been a politically popular part of the tax code (a fuller discussion of which is provided below). As is so often the case, therefore, everything old in politics is new again. There is another saving "crisis," and the tax code can set everything right.

Most analyses of the various proposals to date (including the so-called Flat Tax, a national sales tax, the "USATax," etc.) have concentrated on the distributional impact of the plans, along familiar lines of progressivity and regressivity. Surprisingly little critical attention has been paid to the macroeconomic implications of these tax reform plans, particularly to the claims about saving. This essay will offer such an analysis by reviewing recent work on causal relationships crucial to the political arguments of those who favor changing the tax code as a way to increase saving. I will also review arguments well known to most readers of this journal that are too often overlooked in public discussion.

Saving in the United States

It would be difficult to find more agreement about the desired direction of a non-policy variable than the rate of saving in the United States. Virtually everyone with an opinion on the subject seems absolutely certain that saving is currently too low and needs to go up if the future is to be saved (no pun intended). The very repetition of this conclusion, moreover, creates its own legitimacy, causing those without a well-thought-out opinion on the issue to adopt it as a default and intimidating those who would dare to question this obvious "truth."

Since the concept of "saving" is often defined in inconsistent and contradictory ways, it is useful and important to look at alternative definitions of the term and to examine the trends in various measures of saving in the U.S. economy. Among other things, this investigation will show that the most inclusive and macroeconomically important saving rates are not moving downward.

Of course, institutionalists have long known that the concept of saving is broadly misunderstood. Several good examples of institutionalist critiques of the mainstream approach to saving and fiscal policy have appeared in this journal. The interested reader should consult Walter C. Neale [1991] and L. Randall Wray [1989, 1992].

Difficulties in Defining Consumption and Saving

In discussions of an economy's rate of saving, it is common to emphasize the rate of personal saving - the ratio of take-home pay not spent on goods and services to total take-home pay. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Taxes, Saving, and Macroeconomics
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.