What’s the first step to revising America’s low saving rate? Cut out all the current incentives for savings enshrined in the tax code. It’s not as crazy as it sounds. Recently, Senate Finance Committee leaders Max Baucus and Orrin G. Hatch endorsed this radical approach to tax reform by vowing to wipe the code clean and start over with a blank slate.
Since Congress last passed a comprehensive tax reform in 1986, there has been a proliferation of deductions, credits and expenditures that have added complexity but generated meager amounts of net new savings. The senators vowed to justify each and every deduction, credit and expenditure that makes its way back into the tax code. They’re on to something. Rather than costly tax shelters, we need incentives that work. The “blank slate” approach offers an opportunity to go back to the drawing board and get it right.
The current code gets plenty wrong. Not only does it fail to promote fundamental policy goals, it wastes precious public resources. For example, study after study shows that the 401(k) and the individual retirement account fail to help Americans build savings, even as the cost to the government of offering these tax shelters rises. The Congressional Budget Office has shown that two-thirds of the benefits associated with these tax expenditures gets funneled to the top 20 percent of earners who make the bulk of the contributions to these tax-advantaged accounts but need the least amount of help building up their nest eggs.
What’s more, mounting evidence shows that the rich aren’t saving more in response to these incentives: They’re just shifting funds that would have been saved in taxable accounts into nontaxable accounts. The wealthiest Americans aren’t cheating here; they’re just playing by the rules written by Congress. The problem is that the game isn’t fair or particularly smart. The lower 60 percent of income earners — the very families that could use the support — are allocated just 16 percent of the tax benefits.
What we need are real supports for all Americans to save. Instead of the current, upside-down system of conferring gifts to the retirement accounts of the already wealthy, consider the possibilities of an accessible and flexible financial security credit that would provide real saving incentives for working families. In lieu of a tax deduction for contributions to designated accounts, we would encourage saving among families who actually make financial sacrifices to save for their retirement, their child’s college education or an emergency fund. For the single mom in the 10 percent tax bracket, suddenly an abstract 10 cent benefit on owed taxes becomes, say, a 50 cent matched benefit deposited directly in her daughter’s college savings account.