Question

How does a tax on interest income influence a person’s willingness to save? Can the impact of the tax on saving be unequivocally predicted from theory? Explain why or why not. Do you believe interest income should be taxed? Support your answer with a discussion of specific relevant concepts you have learned thus far in this course.

Answer 1

If there is a tax on interest income then person will not save much, thus it demotivate the person's willingness to save.

Impact of the tax on saving can't be unequivocally predicted by theory though tax on saving demoralise the person from saving but it is not equally true for everyone. There is different behaviour of each individual and we can't say person will stop saving due to tax. Though one will try to monimise the tax by exploring different tax free options on saving.

Interest income should not be taxed because sometime person save money for some big investment, if government will charge tax on interest income then one might not save that money and take loan to complete the investment options e.g., buying a house. But government should make sure that one has not very much money in saving account and generating interest income on same. There should be policy where if interest income is over a certain threshold then it should taxed.