Principles of Economics- Mankiw (5th) 779

Principles of Economics- Mankiw (5th) 779 - CHAPTER 34 F I...

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CHAPTER 34 FIVE DEBATES OVER MACROECONOMIC POLICY 805 of her income to have a more comfortable retirement at the age of 70. If she buys a bond that pays an interest rate of 10 percent, the $1,000 will accumulate at the end of 45 years to $72,900 in the absence of taxes on interest. But suppose she faces a marginal tax rate on interest income of 40 percent, which is typical of many work- ers once federal and state income taxes are added together. In this case, her after- tax interest rate is only 6 percent, and the $1,000 will accumulate at the end of 45 years to only $13,800. That is, accumulated over this long span of time, the tax rate on interest income reduces the benefit of saving $1,000 from $72,900 to $13,800— or by about 80 percent. The tax code further discourages saving by taxing some forms of capital in- come twice. Suppose a person uses some of his saving to buy stock in a corpora- tion. When the corporation earns a profit from its capital investments, it first pays tax on this profit in the form of the corporate income tax. If the corporation pays
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This note was uploaded on 08/01/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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