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Tax Policies to Encourage Saving and Help Even Out the Unfairness of Our Existing Government Policies?


In the last few days I've seen more commentary on this issue of how the government should not forget savers and retirees who are having to deal with record low interest rates. Here's an excerpt from a recent commentary from MarketWatch's chief economist:

Since the banks are apparently in good financial shape, it's time for the Fed to consider the needs of the silent majority -- the nation's savers -- and raise rates so that they can become healthy, too

I published Notices of two related articles over the weekend from the Boston Globe. The first article described the difficult environment that exists for those who live off their interest income:

With significant rate hikes probably a long way off, conservative investors face a difficult choice: Cope with reduced income or choose riskier options with potential for better gains.

The other Boston Globe article was a commentary that suggested three tax policy changes that would encourage more saving and discourage debt. The author also noted the problem with our current system:

our totally unrepentant financial system is being rebuilt while savers are punished with yields that guarantee their savings will lose purchasing power.

His three suggestions would definitely help lower the tax burdens for savers and retirees. However, I'm not sure if they would have a chance of getting broad support. Wouldn't it be better to push for a small change that could at least have a realistic chance of receiving broad support?

With the idea of a small change with some chance of getting broad support, I came up with two small tax policy changes of my own:

  1. Remove the qualifying income requirement for IRA contributions - Currently, only compensation income is allowed for IRA contributions. This would be an easy way to help retirees. They would be able to contribute to Roth accounts with money from either their pensions or interest income. For Roth accounts, that money would then grow tax free.
  2. Start a Tax-Free Savings Account (TFSA) program - Canada started a TFSA in January 2009. It's like a Roth account in that any interest or gains is tax free. Unlike a Roth account, it's not just to help people with retirement savings. Money can then be withdrawn at any point of time, without penalty. It shouldn't have a major impact on tax revenue since there's a cap of $5K per year in contributions (will be indexed with inflation).

The above ideas are not major changes, but they would encourage savings and at least give a little reward to savers. They're practical in that they wouldn't be a major hit on tax revenue. Do you think they would have a chance? Do you have any suggestions? If you do, please share them in the comments.

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