Today's tax code confiscates a large portion of peoples' earnings and imposes a higher burden on income that is saved and invested than it does on income that is consumed. Indeed, the government may subject any returns from investments to as many as four layers of tax. These additional taxes send a very clear message: Spend your money, don't save it. Indeed, considering all the ways taxes punish savings and investment today, it is surprising that anyone saves at all.

Although the income tax is the biggest culprit, Social Security taxes also have an adverse impact on savings. Simply stated, workers save less because they expect the government to provide for them when they are senior citizens. The impact of Social Security is particularly profound among lower- and middle-income taxpayers; the 12.4 percent payroll tax, especially combined with other taxes, leaves them with very little disposable income. What makes this particularly frustrating is that workers could enjoy significantly better retirement income if they were allowed to shift a portion of their payroll taxes to personal retirement accounts.

Fixing the tax code's bias would be good for workers and good for the economy. To help more Americans to save more,

1. Individual retirement accounts (IRAs) should be made universal.
   Traditional IRAs and employer-sponsored 401(k) accounts allow the taxpayer to defer taxes on income that is saved. This eliminates double taxation on the "front end." Back-ended or Roth IRAs also avoid double taxation of savings, but they use the opposite approach: Income is taxed once in the year it is earned, but there is no second layer of tax if the money is saved and generates a return. Unfortunately, onerous restrictions limiting who can participate and the amount that can be saved accompany both types of IRAs today. The ideal solution is to make both types of IRAs universal, allowing all taxpayers to save as much as they want without facing double taxation.

2. Double taxation on other forms of savings should be eliminated.
   Ending IRA restrictions would boost retirement savings but not help families trying to save for home purchases, educational expenses, unanticipated health care costs, or any other reason. All savings should be protected from double taxation. One easy way of achieving this goal would be the elimination of withdrawal restrictions on IRAs (in other words, allowing people to access their money at any time for any reason).

3. The Social Security system must be reformed to allow all workers to save more for retirement.
   Many workers, particularly those with lower incomes, find it difficult to save for retirement because there is little or no income left after fulfilling basic financial obligations. And because taxes are the largest portion of the average family's budget--exceeding the cost of food, clothing, shelter, and transportation combined--reforms that would allow workers to shift payroll taxes into personal retirement accounts would have an immediate and long-range beneficial effect.

4. Tax penalties on dividends, estates, capital gains, and other forms of capital should be eliminated.
   Dividend income is taxed twice under current law. Ending this bias against corporate investment requires that dividends either be exempt from the corporate income tax or the personal income tax. A neutral tax code also would require the elimination of the capital gains tax and the death tax. These taxes are imposed on assets, yet any income generated by these assets already is subject to tax.

America does not face a savings crisis, but the level of savings in the economy is significantly lower than it would be in the absence of ill-advised government policies. The income tax code confiscates too much income, imposes excessive layers of tax on capital, and biases individuals and businesses toward consumption.

The current tax bias against savings and investment should be eliminated. Replacing the tax code with a simple and fair flat tax is the ideal solution. Not only would a flat tax ensure that savings no longer would be double taxed, but it also would fix all the other problems in the current tax code.

Daniel J. Mitchell, Ph.D. is McKenna Senior Fellow in Political Economy at The Heritage Foundation.