Paper Release: Personal Savings and Tax Reform

With Congress locked in a seemingly endless loop of disagreement and dysfunction, hoping for a big, bipartisan effort to reform our tax code seems more and more like wishful thinking. Still, there are signs of promise. Senator Max Baucus and Representative Dave Camp, both chairmen of their respective tax-writing committees, launched a nation-wide “road show” last week to bring attention to the need for tax reform. While much of the attention generated by the effort has focused on the big money of corporate tax reform, a more urgent issue for average Americans is reforming personal savings incentives. A new paper that I co-authored with Reid Cramer explains why our current system, though supposedly providing generous tax incentives to save for retirement, homeownership, and education, actually fails to support savings among lower- and middle-income Americans and, in doing so, wastes billions of taxpayers’ dollars every year.

Our current system of providing saving incentives through the tax code misallocates a significant amount of funds to wasteful and inefficient policies. Yet it has heretofore remained shielded behind a politically popular narrative that our current tax incentives help Americans overcome a dangerously low saving rate. In fact, as our paper shows, the current tax code encourages little net new savings, provides inadequate incentives for average Americans, wastes over $300 billion a year (or around 2% of the United States’ entire GDP), and gives high-income earners superfluous rewards for saving.

The paper, Personal Savings and Tax Reform: Principles and Policy Proposals for Reforming the Tax Code, begins by making the case for maintaining saving incentives in the tax code, as long as they work to accomplish their stated goals. Providing savings incentives through the tax code is sound public policy in theory, and to this extent our current system has its merits. Yet our current tax incentives fail to deliver on their promises; the paper’s second section explains why this is the case. This section, “The Case for Tax Reform,” is divided into three subsections, each focusing on a socially beneficial savings goal: retirement, homeownership, and education. We find that in each of these areas, the tax code is deficient in providing meaningful incentives. Our system rewards those who would save even in the absence of an incentive, without encouraging net new savings among all other Americans. We also find that in each of these areas, the current system funnels the vast majority of benefits to the highest-income earners while swindling the rest of the nation through deflated tax receipts.

We next provide a framework for reforming the tax code by identifying four principles that should guide future reform efforts. The tax code should embody the ideals of simplicity, efficiency, inclusivity, and fairness. As examples of how the tax code could achieve these ideals by providing saving incentives, we offer two extensive policy proposals that would help all Americans build greater savings. The first proposal is to establish a flexible and accessible Financial Security Credit that would encourage savings among those Americans who up until now have saved the least and have historically faced the fewest tax incentives for saving. The Asset Building Program has previously advocated for this proposal. The next is to create a Universal 401(k) that would function like its existing private-industry counterpart, but would be available to all workers, regardless of their employer’s willingness to offer retirement savings benefits and regardless of a worker’s transience between employers.

For more information about personal savings tax incentives, tax reform, and recommended policy proposals, please read the full paper available online here. You can also tweet us your thoughts on tax reform, the tax code, or how we can better promote savings opportunities for all Americans at @AssetsNAF using the hashtag #savingsreform.