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The real message on America's Tax Day: don't bother saving The real message on America's Tax Day: don't bother saving
(6 months later)
Why can't the government manage its budget like most households do? You hear some variation of that theme a lot lately – from both sides of the aisle.Why can't the government manage its budget like most households do? You hear some variation of that theme a lot lately – from both sides of the aisle.
The implication is that American households are good at family finances. When we have less money coming in, we cut back. We balance our budgets by prioritizing what's really important. Not everyone goes to Disney World or the beach annually.The implication is that American households are good at family finances. When we have less money coming in, we cut back. We balance our budgets by prioritizing what's really important. Not everyone goes to Disney World or the beach annually.
But here's one flaw in the family budget v federal budget metaphors: America's tax system favors those who are in debt and penalizes those who save. As a friend of mine explained to me when I was in my 20s:But here's one flaw in the family budget v federal budget metaphors: America's tax system favors those who are in debt and penalizes those who save. As a friend of mine explained to me when I was in my 20s:
"Want to lower your federal taxes? Just have a child and buy a house. We pretty much don't pay taxes anymore.""Want to lower your federal taxes? Just have a child and buy a house. We pretty much don't pay taxes anymore."
That's right, the more you spend and go into debt, the lower your taxes get in America. Debt isn't necessarily bad, but it's become obvious that much like the US government has trouble getting to a balanced budget, families aren't always meeting their commitments, either.That's right, the more you spend and go into debt, the lower your taxes get in America. Debt isn't necessarily bad, but it's become obvious that much like the US government has trouble getting to a balanced budget, families aren't always meeting their commitments, either.
My friend was right. For many middle class families, buying a house is the biggest help on their taxes. They are able to deduct the interest they pay on their mortgage, along with property taxes. This is followed by up to $1,000 credit per child.My friend was right. For many middle class families, buying a house is the biggest help on their taxes. They are able to deduct the interest they pay on their mortgage, along with property taxes. This is followed by up to $1,000 credit per child.
Then there's the educational tax credit for those who go into debt to pay for university and the credit for donating to charities. You can even get money off on your taxes for renting a bank lock box and paying someone to fill out your tax return for you.Then there's the educational tax credit for those who go into debt to pay for university and the credit for donating to charities. You can even get money off on your taxes for renting a bank lock box and paying someone to fill out your tax return for you.
On the flip side, if you actually save money, you get to pay extra for that privilege. The interest you earn on your savings in the bank? Yup, that gets taxed as income.On the flip side, if you actually save money, you get to pay extra for that privilege. The interest you earn on your savings in the bank? Yup, that gets taxed as income.
You can argue there are good reasons for the government to encourage people to have children, get an education and even buy a house, since homeownership tends to build stronger and more stable communities. And certainly plenty of good deeds are funded from charitable donations.You can argue there are good reasons for the government to encourage people to have children, get an education and even buy a house, since homeownership tends to build stronger and more stable communities. And certainly plenty of good deeds are funded from charitable donations.
But it's equally true that saving has benefits to people and the economy. As Jimmy Stewart's character in the classic film It's a Wonderful Life explains when people try to pull their money out of the local bank:But it's equally true that saving has benefits to people and the economy. As Jimmy Stewart's character in the classic film It's a Wonderful Life explains when people try to pull their money out of the local bank:
"You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can.""You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can."
Reports are that Americans save only about 4% of their income. Compare that to China and India where households save over 30% or many parts of Europe where people save over 10%.Reports are that Americans save only about 4% of their income. Compare that to China and India where households save over 30% or many parts of Europe where people save over 10%.
We are a nation of spenders. We are also a nation heavily in debt – personally and via our government. The current US debt works out to about $53,000 per individual. We are coming off a home mortgage crisis that sent us into one of the worst recessions in our country's history, and we are likely in a college debt bubble. We've basically got a savings crisis.We are a nation of spenders. We are also a nation heavily in debt – personally and via our government. The current US debt works out to about $53,000 per individual. We are coming off a home mortgage crisis that sent us into one of the worst recessions in our country's history, and we are likely in a college debt bubble. We've basically got a savings crisis.
It's time to alter some tax incentives to encourage saving. At the moment there are some savings promotions. Many workers take advantage of retirement savings vehicles, which can be tax deductible when you put money in or take it out. You can also put money into special health savings accounts, public transportation accounts or even government-run college savings plans. You can also buy tax-exempt bonds.It's time to alter some tax incentives to encourage saving. At the moment there are some savings promotions. Many workers take advantage of retirement savings vehicles, which can be tax deductible when you put money in or take it out. You can also put money into special health savings accounts, public transportation accounts or even government-run college savings plans. You can also buy tax-exempt bonds.
The problem with many current vehicles is that they are mostly pegged to a certain type of expenditure like healthcare. Or you have to lock up your money until retirement. It's not a flexible system.The problem with many current vehicles is that they are mostly pegged to a certain type of expenditure like healthcare. Or you have to lock up your money until retirement. It's not a flexible system.
Frankly, the United Kingdom has a far better savings program with the Independent Savings Accounts (ISAs). Individuals can put just over £5,000 a year tax-free into these cash accounts. This is not a tax haven for the wealthy. A few thousand dollars in a tax "shelter" isn't going to make much different to millionaires. But it does make a huge different to low and middle income families who are trying to put some dollars away – for a house, for a car, for a vacation, you name it.Frankly, the United Kingdom has a far better savings program with the Independent Savings Accounts (ISAs). Individuals can put just over £5,000 a year tax-free into these cash accounts. This is not a tax haven for the wealthy. A few thousand dollars in a tax "shelter" isn't going to make much different to millionaires. But it does make a huge different to low and middle income families who are trying to put some dollars away – for a house, for a car, for a vacation, you name it.
Money in ISAs remains tax free until taken out. It can stay for a year or many years. It's up to the saver. The ISA program also lets the competitive market work. Banks compete for customers by offering good rates, and there are advertisements in UK for these savings products – savings are actually promoted.Money in ISAs remains tax free until taken out. It can stay for a year or many years. It's up to the saver. The ISA program also lets the competitive market work. Banks compete for customers by offering good rates, and there are advertisements in UK for these savings products – savings are actually promoted.
As any US saver knows, it would be nice not to have to fork over extra money to Uncle Sam because you did something responsible like saving for a rainy day.As any US saver knows, it would be nice not to have to fork over extra money to Uncle Sam because you did something responsible like saving for a rainy day.
And if more people start saving, maybe the government will figure out how to do a bit of that, too.And if more people start saving, maybe the government will figure out how to do a bit of that, too.
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