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Personal Savings and Tax Reform

Principles and Policy Proposals for Reforming the Tax Code
July 22, 2013 |
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Click here to read the full paper.

The tax code is riddled with inequities, especially for families with lower incomes and fewer resources. While some low-income households benefit from refundable credits provided in the tax code such as the Earned Income Tax Credit, many more are categorically excluded from benefiting from valuable tax incentives. The nearly 70 percent of Americans that do not itemize on their tax returns cannot access a range of valuable benefits, deductions, and write-offs that amount to huge tax-saving benefits to higher-income households. High percentages of lower-income families do not own a bank account, do not work for employers that offer savings plans or matched deposits, and do not have sufficient tax liabilities to access tax benefits. Many more are simply confused about the rules governing tax-advantaged accounts that ostensibly are designed to promote increased savings for all Americans.

As currently designed, our tax system facilitates substantial rewards for high-income earners without advancing the intended social goals of providing inducements to save for the low- and middle-income families that need saving incentives the most. This is a policy failure. A large-scale and systematic reform of the tax code offers an opportunity to more effectively promote increased saving and asset building as a means to help families increase their financial security and economic mobility.This paper makes the case for reforming the tax system to better reflect the true purpose of personal savings tax incentives: to encourage saving among those who otherwise could not afford to.

To read the full paper, please click here.

Given the enormous inefficiencies and inequities in the delivery of personal savings incentives under current tax policy, it is imperative that meaningful reform of the tax system is diligently pursued. A framework for reform of the kind outlined here, one that promotes simplicity, efficiency, inclusivity, and fairness, would meet that standard and promote not only more net new savings for the population as a whole, but also greater rates of saving among the most financially vulnerable households.

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