When people hear the term “tax reform,” they can be forgiven for rolling their eyes and not expecting much in the way of innovative policy change. The US tax code is notoriously difficult to tame, and politicians too often talk tough during campaigns only to develop selective amnesia about our fiscal health when in office.
What’s worse, they rarely consider the need to cut federal spending to pay for any changes. So while taxpayers may enjoy short-term benefits from marginal tax cuts, in the long term, our wealth is eroded by growing debt and interest payments. In the meantime, too many Americans lack attractive options to save their money for the hard times that are sure to come.
Following last December’s Tax Cuts and Jobs Act, House Republicans are now proposing “Tax Reform 2.0.” The Trump administration and Republicans in Congress have trumpeted the supposedly revolutionary effects of 2017’s tax reform package. If you are among the households that benefited from the plan’s lower rates, you are probably at least marginally satisfied. But if the beta release was so cutting-edge, why the quick need for a 2.0?
Lower rates are nice, but they’re even better when they come with spending cuts to pay for them. The Trump tax cuts did not. More generally, Americans should be tired of tinkering around the edges of established IRS rules. To really reboot the tax code, bold thinking is needed.
The good news is that there’s a major tax policy idea in tax reform 2.0 that is worthy of another tax bill: universal tax savings accounts (USAs). It’s not a new idea, but it was included in the House Ways and Means Committee’s recently released policy framework outlining the goals of “Tax Reform 2.0.” To secure their goals of “helping families start saving earlier and more through their lives,” the majority party supports “creating a new Universal Savings Account to offer a fully flexible savings tool for families.” It’s near the end of the document, but it made the cut.
USAs are a great combination of radical and obvious ideas. They are radical because they would be a significant departure from the way that we currently manage saving options. They are obvious because there’s no strong policy reason to not do this.
Because income taxes, which are inherently anti-savings, are the largest source of federal revenue, we have had to engineer a whole host of workarounds and incentives for tax-shielded savings.
If you are a white-collar worker, you likely have access to your company’s 401K, which allows you to save $18,500 in untaxed income a year for retirement. Then there’s special-purpose Health Savings Accounts (HSAs) and Education Savings Accounts, which have their own limits. However, many jobs don’t have access to 401ks or HSAs. These workers have access to IRAs, but the contribution limit is a measly $5,500 a year. For all these accounts, there’s also a host of rules about early withdrawal penalties and how the monies can be spent.
Why all of this inconsistency and confusion? The tax code has been painfully accumulating into the mess it is today due to short-term thinking and political expediency, but the net effect is a regressive system that is less accessible to lower income brackets for no good reason.
Enter the USA, which is much simpler. These tax-advantaged accounts would allow Americans of all income brackets to save money for any purpose—retirement, healthcare, education, or just a rainy day—without penalty or arbitrarily low limits. In addition to eliminating regressive regulations on tax-preferred accounts, USAs would do away with the double taxation on savings and thereby encourage Americans to build up their badly-needed nest eggs. If we can’t rely on programs like Social Security to be solvent when we need them, we can at least save for ourselves.
Despite their patriotic acronym, USAs were actually first implemented by Canada and the United Kingdom. They have been smashing successes. As the conceptual father of USAs, the Cato Institute’s Chris Edwards explains at The Federalist, Canada’s 2009 Tax-Free Savings Account (TFSA) creation has stimulated a wave of savings across the border, which has helped household finances and independence. Then there’s the UK’s Individual Savings Accounts (ISAs), which allow citizens to squirrel away taxed income that earns tax-free interest and can be spent at any time without penalty. In both countries, lower-income households make up the bulk of USA account holders.
Why in the world would we not embrace USAs? You can’t even blame politics. This is one of those rare reforms that strongly appeals to both parties. Republicans often say they love policies that encourage financial independence and limit government nannying. Democrats say they are keen to tear down arbitrary rules that mostly benefit the well-off while remaining inaccessible to everyone else.
Luckily, there seems to be some appetite for USAs. If this idea sees the light of day in America, Tax Reform 2.0’s USAs should not just be a watered down version of the real deal. Their limits should be generous and there should be no restrictions placed on what people can spend their hard-earned money.
If Congress really wants to be innovative in their techy-sounding new tax plan, they need to let us put our money where our dreams are and finally create a universal savings account option for Americans of all backgrounds.
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