No where are laws and legislation a stronger form of social engineering then when it involves the economy and taxation. Tax incentives and the fuzzy math that surrounds our complicated tax system often clouds the issues. Its often not how much money is spent but rather how the money is spent that determines the value of an investment. One obvious place this plays out is in savings, by taxing interest of a simple savings account the government makes the act a far less compelling investment.
America’s lack of savings is repeatedly pointed to as a problem, yet laws, that tax interest make small savings accounts a non-starter when coupled with the factors of inflation and bank fees. For a long time I’ve promoted a program that makes the first Two Hundred Dollars of interest from a savings account non-taxable as a way to encourage savings. At a four percent interest rate it would allow for the interest on a five thousand dollar savings account not to be taxed, currently rates are paying a much lower rate.
This change would create a more positive savings environment for those most likely to need a safety net from job layoffs, auto repairs, illness, and other misfortunes. Cost to the Federal Government if the holder of such an account were in the twenty percent tax bracket would be Forty Dollars per year. This is far less costly than the assistance programs we must put in effect to help when bad things happen to those with no buffer or savings and their financial house then collapses.
Considering all the complex tax laws and legislation Congress enacts this would be one of the simplest to write and enact. This is an easy to implement alternative to complex schemes like former President Bush’s Social Security Reform and ownership society plans. That plan and many others would create huge administrative problems further adding to Governments growth and intrusion into our lives. Something that encourages middle and lower income Americans to save should be built into and tax reform legislation put forth.
Footnote; The special breaks and deduction that make up Americas tax code are
massively confusing. Most people are totally ignorant of tax law and
have no idea what they are talking about when they express an opinion on
what policy changes should be made,or how they will effect the economy. More on the subject of taxation below,