Saving Saving (In the West, people simply do not save enough. The question is why)

Nationa Review ^ | 10/07/2010 | Andrew Stuttaford

[SeekAndFind]

Here’s a piece from the Economist’s Buttonwood blog on the West’s savings problem: people simple simply do not save enough. That’s true enough. With striking exceptions in certain countries, they don’t. There are plenty of reasons for this, but the author passes too lightly over the disincentive role played by taxation, simply noting:

 

 

The tax system varies from country to country, but it is quite common for interest payments to be tax deductible while interest receipts are not. Indeed, it is hardly surprising that many people view their houses as their nest eggs, since in addition to interest deductibility (in the US at least), capital gains on the main home are free of tax. This distortion to the system is very hard to remove once in place.

 

 

The argument about the distortion caused by the tax deductibility of mortgage interest is a familiar one in the Economist, a magazine based in a country where mortgage interest is no longer tax deductible. Oddly, however, its journalists rarely get round to questioning the fact that capital gains from the sale of a principal private residence are taxed in the US (albeit with exemptions). Nor do they mention the fact that (at least in urban and suburban America) property taxes may well be significantly higher than in Europe.

 

Like it or not, a house is a form of saving and, at the very least, any capital gains levied on its sale should only be taxed on an inflation-adjusted basis (if at all), a principle that should ideally be extended to all capital gains and, if interest on savings is to be taxed, to that too. If, net of tax and inflation, the real rate of return on saving is negative, that’s hardly the most compelling argument to go in for it.

 

And how might these tax “breaks” (we could debate the term) be paid for? Well, how about doing more to shift a higher percentage of taxation away from income and onto consumption. I believe there’s a handy tax called VAT that might just help do that.

 

Also avoided is one other point well worth mentioning in the light of current debates. To what extent would the means testing of social security (and Medicare) entitlements operate as a disincentive to save? Quite a bit, I reckon.

[Red Badger]

The reason:

The (D) Congress during Reagan’s term, took away the $600 tax exemption for passbook savings account interest. Now, every single penny of interest is taxed at the same rate as wages. That’s why no one saves anymore. There’s no money in it............

[PeterPrinciple]

The assumption is that the only way to save is with interest bearing instruments.

The real question is how are people storing their wealth. In africa you put your wealth in gold and wear it so you don't lose it. Getting close to that here.

[GonzoGOP]

Saving only makes sense if there is a low inflation rate. With Obama actively encouraging hyper inflation there is simply no reason to save. Any money saved will be taxed away or rendered worthless.

[SeekAndFind]

RE: Now, every single penny of interest is taxed at the same rate as wages

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Is this true with all other western coutnries? Or are there other western countries that encourage saving?

[PeterPrinciple]

I believe there’s a handy tax called VAT that might just help do that.

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Does any here remember how they bribed the people into accepting withholding from wages. Getting people to pay last years tax and this years tax in the same year takes some real creativity.

[LibLieSlayer]

Those Americans that have anything left are saving. Most do not have enough to make ends meet. obamunism is a nasty evil entity.

LLS

[Tax-chick]

People simply do not save enough.

Enough for what? Enough to satisfy whom? Make a case for saving as a normative personal or societal good, don't just assert it.

[RayChuang88]

This article is all the more reason why we need MASSIVE income tax reform so it encourages personal savings and capital investment staying in the USA. That's the reason for my tagline.

[NeoCaveman]

The zero interest rate policy of the Federal Reserve isn’t helping savings aka capital formation either.

[csmusaret]

If we did save more Matthews would accuse us of hoarding to hurt Obama.

[SeekAndFind]

Here’s a question for you and the others — why don’t we consider our IRA’s, 401K’s, ROTHs and others (which are tax exempt) as SAVINGS?

Savings isn’t just putting your money in the bank and letting it earn interest.... it’s putting money away for your retirement so that you don’t have to depend solely on that Ponzi scheme called social security.

In Australia (OK, it’s not the west but it has a western culture), they have something similar called SUPERANNUATION.

In this sense, We in America and Australia ARE SAVING. I don’t know about the rest of Europe, but I suspect they must have something similar.

[Red Badger]

Don’t know.............

[PGR88]

The Reasons:
- The USA has been blessed with great peace and prosperity over the last 70 years. The last generation that knew real poverty are nearly all gone. Why save when a new flat-screen TV is desired?
- The FED has been financing Gov’t money-printing through stealth inflation the last 30 years. Especially now - who will save if interest rates are zero? Real money would give us REAL interest rates

[mosaicwolf]

The answer is simple.

"I want it now!"

"I want it now!"

"I wnat it now!"

[RayChuang88]

Those plans you mentioned are mostly tax deferred, NOT tax-free. By essentially making bank account interest, capital gains and stock dividend payments tax-free (which FairTax and Steve Forbes' flat tax plan does), it discourages Americans from offshoring jobs, factories, corporate headquarters and (by some estimates) up to US$16 TRILLION in American-owned liquid assets for income tax avoidaance reasons.

As such, that means millions of outsourced jobs return to the USA, closed factories are modernized and return to operation, and banks are overflowing with liquidity that can be used for new business loans and lines of credit--a win-win for everyone involved.

[KarlInOhio]

Does any here remember how they bribed the people into accepting withholding from wages. Getting people to pay last years tax and this years tax in the same year takes some real creativity.

The current incarnation of withholding started in 1943 where is was sold as a combination of convenience and patriotism during WW II. Here is an article from the Cato Journal Evolution of Federal Income Tax Withholding: The Machinery of Institutional Change

[ßuddaßudd]

We've been trained not to with Consumerism. . . .

[Sequoyah101]

Why bother? We have saved 20% or more of our gross since we began 35 years ago. Every bonus or windfall went right back into savings. To do that we had to forgo a lot but we were trying to follow the example of the ant and not the grasshopper. It didn’t hurt us and we lived well but not high. We didn’t want to be taken care of and we wanted to be able to help family that we knew would need the help.

We invested as recommended in long term mutual funds and blue chip stocks. We set a savings goal that should have provided a comfortable retirement by now and it didn’t work. Inflation, taxes and capricious regulation with the attendant uncertainty have not destroyed the nest egg but have made the amount saved NOT ENOUGH. It is enough though to be wiped out by inheritance taxes and that means costly insurance and estate planning.

We have made a long trip since starting with a good raising, an education and everything we owned in the toolbox of the pickup. If what we did didn’t work I see no hope for the vast majority so, why bother?

[KarlInOhio]

I remember way back in the olden days of two thousand aught nine when many in the government were complaining that people had reduced their spending too much and were paying off too many loans and saving too much money when they should be spending it to boost the economy. Even Keynes "Paradox of Thrift" was being trotted out regularly.