Personal income tax is charged on the personal disposable income of an individual. The personal saving can be defined as the amount that is left after subtracting consumption expenditure from the disposable income. With the increase in the personal tax rate, the disposable income is reduced considerably and hence the individual saving amount is bound to fall.
The same relationship can be drawn in case of the corporate tax rate and savings. As the corporate tax rate increases, the retained earning of the company is also affected. This eventually affects the savings of a particular firm.
According to the theory of marginal propensity to save, as the income increases the savings of an individual also increases. It can also be said that as the income increases the income tax rate also increases. But if the rate of tax increase is greater than the rate of income increase, then the disposable income may fall and hence the individual savings may also get affected.
The theory of marginal propensity to consume can also be applied to the tax rate and savings relationship. As the consumption increases, it also means that the personal disposable income also increases. And as the income increase, the tax rate may also increase thus decreasing the saving.
There are a number of investment plans that are kind of saving schemes aiming to give the investors some tax relief. Mainly these types of investment schemes focus on some social developments mainly initiated by the government. Individuals can go for such investments and save their tax considerably.
