Savings and Tax Reform

In recognition of the challenges inherent in pursuing tax reform, President Bush established an advisory panel in January 2005 which was asked to develop options for reforming the tax code. The President’s Advisory Panel on Federal Tax Reform took its mandate seriously, and its final report, issued in November, includes a range of far reaching ideas and specific proposals worthy of public debate. A number of recommendations would affect fundamental decisions about how households choose to save or consume, and thus directly impact the broader process of asset building. This issue brief focuses on this aspect of the Panel’s work, beginning with a description of the proposals with respect to savings, followed by an analysis of the effects of these proposals on lower-income and lower-resource households, and a presentation of some alternative ways to promote savings within the context of tax reform.

Given the complexity of today’s tax code, the Panel’s call for simplification should create a more efficient tax system, yet the impact of their savings proposals is less clear. This is because the Panel relies on incentives that promote asset shifting rather than net new savings. A more effective way to encourage savings would be to create an accessible and inclusive savings platform, one that would be supported by targeted incentives and policies to ensure maximum participation in the savings process.

For the complete document, please see the attached PDF version.