Economics

Universal Savings Accounts Help People Help Themselves

The case for individual economic choice.

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Republican presidential contenders have staked out different positions on tax reform. Sens. Rand Paul of Kentucky and Ted Cruz of Texas and neurosurgeon Ben Carson favor a flat tax. Wisconsin Gov. Scott Walker supports lower marginal tax rates. Former Arkansas Gov. Mike Huckabee would like a 30 percent tax on consumption. Sen. Marco Rubio of Florida favors a huge child tax credit and business tax cuts.

In spite of their differences, all of them agree that our tax code should be reformed to lift the financial pressure on the middle class and stop discouraging savings. The good news is that there is one reform idea that would do just that and should appeal to these leaders and the public: universal savings accounts, or USAs.

The idea was first proposed in 2002 by the Cato Institute's Chris Edwards and Washington lawyer Ernest Christian. As Edwards, who is a fervent advocate of the reform, explains in a recent piece for The Federalist, the idea is simple: "Such accounts would be like Roth Individual Retirement Accounts (IRAs), but for all types of savings, not just retirement savings. People would contribute after-tax income to USAs, and then all earnings and withdrawals would be completely tax-free."

This policy would go a long way toward addressing one of the main problems of our current tax code—the double taxation of savings. More savings would add to personal financial security. And more savings would help the economy because when people save, they expand the amount of credit available for companies and innovators to start or expand businesses. Thus, savings are a powerful source of economic growth.

Too often, politicians and reporters lament the weakness of consumer spending and praise policies that stimulate consumption. But consumption—no matter how pleasurable it is in the short run—will not make our economy grow in the long run. It is saving that does that by supplying the investment capital needed for new businesses, such as Uber and Airbnb.

America needs to reduce barriers to saving, and Canada and Great Britain have shown the way with their versions of universal savings accounts. According to Edwards, in Canada, the government created tax-free savings accounts in 2009 and recently expanded them. Canadians can now put away up to CA$10,000 ($8,400) per year in the accounts. In Britain, individuals can now save up to 15,240 pounds (about $24,000) per year in individual savings accounts.

This reform is pro-growth, pro-family, and pro-freedom, with a much-needed side of simplification and flexibility. The simplicity of having only one account encourages savings, all savings, not just the type favored by the government at the time. Also, the key to these accounts is that all earnings grow tax-free and can be withdrawn at any time for any reason, free of taxes and penalties. In other words, the USAs encourage more savings because they are more liquid and flexible.

As a result, data from the British government show that these savings accounts have a wide appeal across the entire income spectrum, especially moderate-income earners. For example, more than half of account holders earn less than $31,500 per year. All in all, almost half of Britons now own an account.

Universal savings accounts help people help themselves in our shaky economy. And they do so without giving special treatment to favored interest groups through the tax code like the giant child tax credit favored by Sen. Rubio. That social engineering is not only unfair but also inefficient.

The bottom line is that USAs are a reform idea that all candidates—Republicans and Democrats—could get behind.

© Copyright 2015 by Creators Syndicate Inc.

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  1. How do savings get taxed twice? You earn income. It gets taxed. Whatever you save doesn’t get taxed again. Only additional earnings on those savings get taxed. If we want to increase savings we should reduce income tax rates, period. Then all earnings get a rate reduction – not just secondary earnings on savings.

    1. So it’s basically a Roth IRA that you put your after-tax dollars into and it would grow tax free while allowing you to make withdrawals at any point

      so you are correct, its only saving the tax on the “unearned” income

      which is funny when savings accounts are paying interest of what? .6%?

      1. It cracks me up each time I look at my savings account statement:

        Interest earned: .24
        Tax withheld: .06

        Wouldn’t want me absconding with that dollar come tax time.

  2. The bottom line is that USAs are a reform idea that all candidates?Republicans and Democrats?could get behind.

    Politicians love losing tax revenue.

    1. In the long run it would increase tax revenues by increasing the buying & spending power of families. Sales/gas/grocery/whatever taxes may be at a higher rate than the family’s income tax bracket. Additionally, lifting a family out of poverty creates less of a drain on the economy. The government LOVES spending money when the economy is booming.

      However, I personally feel this benefits bankers most of all because they would have even MORE money to use for making money.

  3. Wait, this guy says everyone should be forced to put their money in govt bank accounts. And cash should be banned. That way the govt can know at any time how much money you have.

    AND you can tinker with the economy by charging negative interest if the economy is too sluggish, or charge a transaction fee if the economy is too hot.

    What is not to love about the idea that you have to use a govt account for everything and they can charge you “fees” whenever the economy isn’t just perfect.

    http://www.telegraph.co.uk/fin…..-bust.html

    1. I was just about to post that Jimbo. Our “top men” are just epically stupid. Lets count the number of insane assumptions behind that guy’s position.

      1. That top men could manage an economy to that degree of certainty even if they tried.

      2. That governments somehow will resist the temptation to endlessly increase the amount of savings they are stealing.

      3. That the political pressure to avoid any kind of contraction won’t cause the government to never raise interest rates.

      He would set up a system where you are expected to trust the government to stop taking people’s savings in the name of a good economy. Yeah, governments will do that.

      I don’t know what you do with people like that guy other than have a revolution and line them up and shoot them.

      1. I don’t know what you do with people like that guy other than have a revolution and line them up and shoot them.

        Bad morning? It’s almost Friday man, just hang in there.

        1. If he’s volunteering to shoot people, I don’t want to stop him.

          1. If it is those people, you shouldn’t. Pardon my hyperbole, but you tell me what you do with someone like that guy. I can’t see how someone that stupid and that arrogant ever gets better or smarter. Throwing them out of power is great, but you know they will just lurk and come back having learned nothing from the disasters they have caused.

            1. I’ve always appreciated the non-murdery aspects of libertarianism. I think I’ll stick with that.

              1. Self-defense is not murder. At some point the system becomes so corrupt and those in power steal so much, that revolt is the only option. There is no such thing as peaceable revolt. We are a ways from that option, but John is simply pointing out that after trying every other avenue, revolt is always the fall back. Our founders stated as much.

            2. If you can change the system enough that shooting these people is legal, you can also change the system enough to prevent government from having the power to let these people have their way with other people’s money.

  4. People would contribute after-tax income to USAs, and then all earnings and withdrawals would be completely tax-free.

    That is, until the government expropriates them to cover a budget “crisis” of their own making.

    Don’t you people remember the Great Gold Grab of April 1933?

  5. I’d support something like this as a substitute for Social Security.

    The government already makes us hand over a certain amount to them. Much better if we were just forced to save money for ourselves–and we couldn’t touch it until we met the same requirements as the Social Security eligibility requirements anyway.

    At least that way, we wouldn’t be handing the money over to the government to spend–and the government is presently spending all of our Social Security contributions every year.

    At least that way, we’d actually be getting a return on our retirement money–rather than taking a loss on our contributions.

    At least that way, people might come to realize that they’re responsible for their own retirement–rather than the taxpayers or the government.

    1. “At least that way, people might come to realize that they’re responsible for their own retirement–rather than the taxpayers or the government.”

      that is some silly talk right there. At no point should I be responsible for anything.

    2. In an ideal world, I would as well. My fear is that this would end up being looted by wall street and the government. They had a similar system in Japan. People saved money through the post office. The Japanese, being hard working and frugal, saved billions in it. And all of that money was stolen by the big conglomerates giving low interest loans to their cronies. I fear the same would happen here.

      1. My fear is that this would end up being looted by wall street and the government

        “Wall Street” is a bunch of private companies. If you make foolish decisions about who to give your money to, you lose it. That’s a problem with you, not with “Wall Street”.

        Free markets don’t protect you from crooked companies or loss, free markets merely allow you to use your money wisely, instead of losing it through other people’s bad choices.

        . They had a similar system in Japan. People saved money through the post office

        The Japanese post office is a government institution.

        Really, John, you think and reason like the average progressive.

        1. Free markets can’t protect you if the government forces you to save and tells you where to put your money.

          Really bear, pay closer attention. I am fine with buyer be ware but not when the government is forcing you to buy.

        2. This is bullshit. Wall Street is a pseudo-government entity. EVERYTHING that they do is based on their cartelization of the money supply via their government-granted status as primary-dealer. They are little more than the distributors of government-created money.

          1. Wall Street is a pseudo-government entity.

            No, Wall St is a private entity with excellent lobbying. The fault is with our government representatives for giving them stuff, not with Wall St asking for it.

  6. #1. The government wants to discourage savings and encourage debt and consumption. Read any business story and they blame a bad economy on consumers choosing to “save” (paying down debt is considered saving)

    #2 I recall a congressional proposal 10-20 years ago to exempt savings account interest, not other investment income, from taxes up to some modest amount , $1-2k or so. The Democrats scuttled it as “only the rich” can afford to save anything.

    1. #2 I recall a congressional proposal 10-20 years ago to exempt savings account interest, not other investment income, from taxes up to some modest amount , $1-2k or so. The Democrats scuttled it as “only the rich” can afford to save anything

      Sounds like an attempt to funnel business to banks and their lousy interest rates.

      Why not just exempt the first few thousand dollars in any kind of return on investment from taxation?

  7. Instead of incrementally making the tax code and financial system even more complicated in order to address its many awful aspects, can we instead focus on incrementally undoing those awful aspects?

    These sorts of proposals just end up making things worse in the long run.

  8. How about just get rid of SS? That would make me at least an extra 6% a year.

  9. Uh, in the words of quite a few people who comment here: ‘If it is such a good deal, why do we need the government to force people to do it?’
    IOWs, I’m having a hard time with a libertarian site proposing the government ‘help’ people manage their money; we all know that ‘nothing can go wrong’ with that.
    Nope; let ’em blow it on dope and hookers.

    1. That is a great point SEVO. Mandated anything is anti-freedom. How about instead of mandating savings, we get the government to get out of the economy and stop punishing people for saving? How about that?

      1. And on thinking about it further, the savings will be ‘taken’ at the point of a gun; pretty sure that doesn’t really accord with the NAP.

    2. Maybe I missed something but I don’t see where she’s proposing to make these accounts mandatory, just for the government to stop stealing a cut of the interest.

      1. I skimmed the article, and got the impression ‘we’ (taxpayers) were now going to be forced to place X% in savings. A closer read says you are 100% correct instead.
        Ya know, Loki, I’ll take my crow rare with a LOT of hot sauce.

  10. The case for individual economic choice.

    The sad thing is that someone has to write an article making this case. It should be obvious, yet here we are.

  11. This is a whole bunch of stupid. Savings don’t expand the economy; investing does. The surest way to go broke is to save cash that gets eaten away by inflation.

    Dumb idea to be foisted on an economically illiterate middle/working class. I would elaborate, but I’m actually on my way to a three day investing seminar. Because i don’t save money, i grow money.

    1. yeah ,when I first saw it I thought great if I can invest the money – so just like a Roth – but without that, I see no value for me or for the economy. I did the math once on what would have been if I’d been allowed (or forced maybe) to put all my SS into self-managed investments instead of taking the “benefit” I’m entitled to. Deciding what to do with our own money – what a concept!

  12. Who has money left over after taxes to save. Isn’t that the purpose of over taxing so that you can’t save and hence become dependent on the State.

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  14. This proposal has too many hooks and incentives and limits for my taste.
    Why limit it to $10,000 per year? Why not tax the earnings at the same rate as other income?
    Why just savings accounts, why not investments in stocks and bonds? (Or do you mean this money could be put into mutual funds?)

    And who cares if it’s pro-family?

    I’d be happier if I knew that the money could be invested in stocks or bonds, personally.

  15. I really don’t understand how this is supposed to help anything.

    So that $1.12 I make on my savings isn’t going to be taxed? Oh, well now I feel financially secure!

  16. Google is paying 98$ per hour! Just work For Few hours & Spend more time with friends and family. On Sunday i Bought Themselves a Alfa Romeo from having made $18543 this month.
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  17. How big does my child have to be to qualify for Rubio’s giant child tax credit?

    1. Most American children are currently large enough to qualify. The qualification standards are mostly intended to weed out Ethiopian kids

  18. This is really economic bunk. Savings does not create credit. Far more important, there is absolutely ZERO economic value added to any marginal credit now. The global economy has been blowing up bubbles and popping them now for going on 15 years. That is not merely because interest rates are distorted at the margin. It is because most of the actual investment opportunities have already been invested in over the 35 years since interest rates peaked. The high return stuff, the moderate return stuff, the low actual return stuff – all invested in as interest rates dropped and those projects became viable. What we are left with now, institutionally and globally, is the zero-return stuff and the Ponzi schemes.

    The LAST thing we need now is savings. If we needed savings, then someone somewhere would actually provide an incentive to save. NOT some new government scheme to save – but someone in the market who actually offers interest on savings.

    When the monetary system was actually based on surplus production (eg coins); then yeah savings would drive credit and there wouldn’t be a disconnect between the central planners of central banks and the real world economy. But it isn’t and it doesn’t and there is. I expect more out of a libertarian site than some support for yet another freaking government-driven scheme to distort the actual markets.

  19. Articles like these make me happy. Until I realize that the likelihood of something like this coming to pass in my lifetime, much less in the very near future, is about zilch. And then I get depressed. Thanks, Reason.

  20. Here’s a better idea: privatize Social Security accounts. It is simply unconstitutional to force employers and employees to pay into a government retirement Ponzi scheme. Beyond that, and not having a Supreme Court who pays any more attention to the Constitution now than it did under FDR, we should at least push for a private option. It would still be mandatory, however, you could opt to participate in the current plan and send your funds to Washington’s giant black hole, or you
    could opt to deposit the funds into a private bank, credit union or financial institution of your choice. Same “withdrawal” rules apply, i.e. nothing until you reach age 62. When “choice” is such a hot button for the left, why don’t we have choice when it comes to Social Security!

  21. Looking for ways to help Americans? Try this: if you are late on paying your taxes to the IRS, they charge you a penalty AND INTEREST on the money you owe. However, when you pay your taxes in advance, i.e. before April 15, either by payroll deduction or quarterly payment, you receive NO interest from the IRS. This is not fair. If you don’t pay in time you owe them interest but when you pay them ahead of time you earn NO interest? Why are we giving the government an interest free loan? Even the Communist Chinese get interest on the money they loan to the US. Why don’t WE!

  22. The greatest impediment to savings is poor monetary policy and the resulting easy money fiscal policy to clean up the mess. Not saving is fairly rational when you earn a negative real rate of return on savings, in that case people who spend everything and borrow more at a real interest rate near zero or low single digits seems like a prudent idea. Why are people surprised that large numbers of rational people behave in a way that is logical in the current environment?

  23. I think the idea of USAs is a big step in the right direction, but it should be followed up with the second step for a true movement forward: USAs that can act as EITHER Roth or Traditional IRAs. If we are advocating for “pro-growth, pro-family, and pro-freedom” then people should have the freedom to chose whether their savings are taxed before or after growth.

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  25. What pray tell is new about Uber and Airbnb? I’m all for savings, because we’ve clearly run out of credit and the more we attempt to create at this point comes directly out of someone’s pocket. But we could scrap the income tax and use only sales taxes, as was the case when this place was founded. Be a lot less intrusive and messy.

  26. Our personal tax code should be revised to ELIMINATE ALL PERSONAL TAXES. We did well for the first ~150 years in America without this tax. We can do better today if we eliminate it completely and replace it with nothing. That would shrink government by about 90%, put an end to the pointless wars, end the enrichment of the 1% at the expense of the working class and restore freedom to America.

  27. ” The good news is that there is one reform idea that would do just that and should appeal to these leaders and the public: universal savings accounts, or USAs.”

    You do know they’ll be confiscating these, don’t you?

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  29. Start making cash right now… Get more time with your family by doing jobs that only require for you to have a computer and an internet access and you can have that at your home. Start bringing up to $8596 a month. I’ve started this job and I’ve never been happier and now I am sharing it with you, so you can try it too. You can check it out here…
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  30. Nathaniel . although Stephanie `s rep0rt is super… I just bought a top of the range Mercedes sincee geting a check for $4416 this last four weeks and would you believe, ten/k last-month . no-doubt about it, this really is the best-job I’ve ever done . I actually started seven months/ago and almost straight away started making a nice over $79.. p/h….. ?????? http://www.Jobs-Cash.com

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  32. Spot on, V…. I put something like that on my website only ten years ago, too…

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    The “additional plans” list is at the bottom of the page.

  33. Nathaniel . although Stephanie `s rep0rt is super… I just bought a top of the range Mercedes sincee geting a check for $4416 this last four weeks and would you believe, ten/k last-month . no-doubt about it, this really is the best-job I’ve ever done . I actually started seven months/ago and almost straight away started making a nice over $79.. p/h….. ?????? http://www.Jobs-Cash.com

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