Stimulate The Economy By Stimulating Saving? One Progressive’s Idea

While conservatives offer tax cuts as an all-purpose elixir, whether they make sense or not, the truth is that our tax code is out of whack and we should be thinking about progressive reforms.

Laura Kalick, a veteran tax attorney based in Washington, has been thinking about one such reform that she says will provide short-term economic stimulus while addressing the nation’s notoriously low savings rate. Her idea follows. What do you think? Let’s have a dialogue about this and other progressive tax reform ideas.

We are in an economic crisis that has many causes, one of which is excessive borrowing. We are a nation with many tax laws that encourage people to save for retirement, education and health care, but there is no incentive to just save for a rainy day or save to buy a car. And the rules are too complicated for the average person to understand. Furthermore, there is a myriad of paperwork and fees that accommodate setting up accounts that are usually invested in securities.

There is a dichotomy on how investment income is taxed. The tax on interest income is potentially at the highest income tax rate, while the tax on capital gains and dividends has been reduced to 15 percent.

Therefore, it appears that there needs to be an incentive to accumulate current savings and at the same time, to encourage lending.

So here is my proposal: Tax interest income at 15 percent, as are capital gains and dividends, and the first $1,000 is tax-free.

This is an incentive for saving money that can be used anytime for anything. No complicated rules. Assuming a 4 percent interest rate, this means that an individual can save up to $25,000 without incurring federal income tax!

This proposal would be another element of our economic recovery, and would help put the U.S. back on track for economic independence. The proposal would start a long overdue conversion of the U.S. from a debtor nation to a saving nation. We need to find a way to encourage people to save and accumulate capital to invest in their own futures.

With regard to the cost of this proposal, considering that there is currently a negative savings rate in the U.S., it is possible that the loss of revenue may be minimal. In fact, if people really start saving, there will be a source of income to tax that had not been there before. The Joint Committee on Taxation will have to score the cost of this proposal.

The National Savings Plan is for every man, woman and child who have easier access to a savings account than to a brokerage account. A savings account is not subject to the ups and downs of the stock market.

This proposal does not have income limits so that more private capital will go into the system to help support the job growth that we need to pull us out of this recession. This proposal would also provide tax relief for the elderly and others who live on fixed incomes.

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