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The Ladder

A Blog from New America's Asset Building Program

What Do We Want From our Tax System? A Financial Security Credit.

Published:  September 19, 2012

It seems fairly certain that the country is due for a long, hard talk about our system of taxation. If that was in doubt before, the political events of this week seem to guarantee that such a conversation has to happen. Who pays what? Who benefits how? What do we want our tax system to accomplish?

These are critical questions, and they need to be answered thoughtfully because we are long past the time when the answer to the final question was simply, "collect taxes." For generations now, our tax system has provided incentives, penalties, nudges and supports in all different forms. For example, there's more than half a trillion dollars spent through the tax code each year to encourage savings and asset development each year (see our Assets Report Infographic for details.) Supporting saving and asset development is a big and well established part of our tax system, and it is likely to be a part of the discussion about tax reform when that conversation arrives.

When you dig into the infographic above you'll see that policy after policy helps most those that already have the most. Should our tax system be reinforcing wealth inequality? So what do we want our tax system to accomplish? Here's an idea, our tax system should support saving and asset development for all Americans, not just those with high incomes. We should demand a tax system that supports financial security for all Americans. 

For a number of years now we've proposed a policy idea that we've called the Saver's Bonus. The Saver's Bonus would create a savings incentive that works for families in the bottom 50% of the income distribution, those that are largely left out of current savings policy. When filing their taxes, individuals and families could direct a portion of their refund to a savings product of their choice, a product that meets their needs, such as a retirement account, a college savings account, or some type of restricted product that could act as an emergency fund, like a CD or savings bond. Since our existing incentives don't give these families much in the way of benefit a matching contribution, dollar for dollar up to $500, would be deposited directly into the account. This kind of savings incentive make a huge difference in the lives of ordinary, hard working families.

Writing in the recent issue of Democracy: A Journal of Ideas, Bob Annibale from Citi Community Development and Wade Henderson from the Leadership Conference on Civil and Human Rights say:

"Establishing and building savings not only leads to a more stable financial situation for poor people, but also unlocks a wider and potentially more beneficial roster of mainstream financial services...Encouraging people to save opens the gates to other financial products that can help build credit, finance large purchases, and potentially generate greater returns on principal.

A further advantage of a Saver’s Bonus is the prospect of spurring educational and economic mobility. Lack of savings earmarked for educational expenses is too frequently cited as a substantial obstacle to college. Research has shown that young people with a savings account are seven times more likely to attend college than those without one."

We want to be clear about our policy proposals, and we want to be clear about what we want our tax system to do. That's why, starting today, we're going to call this policy proposal what it is, The Financial Security Credit. Here's a short, two-page description of the policies goals and details. Take a look. Think about what you want our tax system to do, and if you like, let me know what you think.

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