Why U.S. tax policy makes saving a sucker's game.

How to understand Wall Street.
April 12 2007 1:06 PM

Spend Every Dime!

Why U.S. tax policy makes saving a sucker's game.

(Continued from Page 1)

Second, to avoid encouraging too much risk-taking, we should treat interest earned in long-term savings accounts as capital gains, not income. This would remove the tax-disadvantages associated with owning safe, income-generating assets as compared to more volatile stocks.

Third, if we really want to encourage saving, we should make long-term savings tax exempt. Even today's retirement vehicles are only tax-deferred: Your money compounds tax-free, but then you have to fork over income tax on withdrawals (neutralizing much of the advantage). Tax-exempt savings accounts don't sound so radical, but when the Bush administration proposed them back in 2003, the insurance industry went nuts: Such accounts might reduce demand for expensive tax-deferred annuities! There were also protests that such accounts would disproportionately benefit those who could afford to save—an issue that could easily be addressed through limited per-year contributions or regular tax rates above a certain level of earnings. In any case, the "Lifetime Savings Accounts" idea now seems to be dead.


So, what our current tax code is saying is, "Don't be a sucker: Spend every dime." And as the personal-savings figures show, that's just what we're doing.

Henry Blodget is the founder, editor, and CEO of Business Insider. Follow him on Twitter.