A tax on interest earned from saving is an example of a tax with a high deadweight loss because
A)it compels retired individuals to rely more heavily on Social Security.
B)it encourages people to consume less and save more for their future expenditures.
C)doing so amounts to double taxation since savings often come from income that has already been taxed once.
D)the savings that are taxed could have been spent on capital goods which will benefit society.

Question

Quizplus · Accepted Answer

Taxing savings interest is considered double taxation since the money being saved has already been taxed once as income. This reduces the incentive for individuals to save, resulting in a lower overall level of investment and economic growth. As a result, the deadweight loss associated with this type of tax is high. A & B are incorrect as they do not address the deadweight loss issue, and D is incorrect as it assumes that all savings are used for capital goods, which is not always the case.

A Tax on Interest Earned from Saving Is an Example