[ranndomderr]

How do income taxes create a disincentive to save? I know and understand that capital gain taxes do (Although I think it is a much smaller factor than this distortion). Because if you save, and you have an income tax, you are going to be taxed initially when you earn the income and also be taxed on any interest/capital gains/etc you earn by saving the money. Moreover, taxing returns to saving drives a wedge between the social return on savings and the return the tax payer receives by saving, therefore saving under an income tax will be below the optimal level. But like you said any tax is going to create distortions, if you tax returns to savings less then you are going to have raise the tax rate and this would distort labor-leisure time more than it is now.