Taxes, Saving, and Macroeconomics

Resident Scholar Neil H. Buchanan offers an analysis of the macroeconomic effects of current proposals to
reform the tax system (e.g., a flat tax or a national sales tax), focusing on the aspects of the proposals
aimed at promoting saving. Buchanan notes that a drawback in the way in which saving is officially defined is that only businesses (and
not households) are assumed to make purchases that have long-term payoffs—that is, personal spending on
items such as education and durable goods is defined as consumption, when in fact it is investment in
long-term economic well-being and therefore should be categorized as saving. The purest definition of saving
would include all resources produced in the economy during the year “that are not consumed today but are put
to use in a way that will provide returns to the economy in years to come.” Consumption also should be
redefined, the author says, to include those items utilized, but not directly paid for by consumers, such as employer-provided
benefits and the value of owner-occupied housing.