Policymakers frequently moan about the low rate of private saving in the United States and its depressing effect on potential economic growth.
They are aiming at the right target, but their aim is badly off. Virtually all of the cures - existing and proposed - involve increasing amounts of complexity in the Internal Revenue Code and greater administrative costs to both the government and to private savers. The time has come to consider a fundamentally different approach.
We can begin by analyzing the existing variety of savings plans which receive special tax treatment -- independent retirement accounts (IRAs), Roth IRAs, Keogh plans, 401(k) plans, and so forth. The common characteristic of all these special tax incentives is that the federal government winds up in effect telling the taxpayer how much to save and what forms the savings can take. Technically, of course, there is no compulsion. Taxpayers have independent choice. They are "free" to lose these tax benefits if they do not choose to conform to the extremely complicated conditions which Congress has established to govern the amounts they can put in -- or take out - from these tax-deferred accounts and the specific procedures they must follow. However, each step of the regulated savings process, including just maintaining the balances of the special accounts that must be set up, involves fees and charges. These costs, of course, reduce the net savings available for investment. Moreover, if taxpayers dare invest any of their saving - and that, of course, is the basic objective justifying the tax incentives - they are faced with additional complications. If you have any doubt on that score, just examine the byzantine capital gains tax form for 1997, the result of a recent congressional "reform." Even if you earn $1 million or more a year, you can still have a very simple tax return. All you have to do is to spend all of your money as you earn it; if, by chance, you save any of it, just put it under the mattress. After all, most of the complexity in the individual or family tax return arises if you invest your savings. My proposal is the essence of simplicity: deregulate the entire savings process. …