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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.
 Spring '10
 abijian
 Economics

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