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Actions speak louder than words right? So why is the interest you earn from a savings account taxed at your marginal income tax rate ^[3] while the dividend income you earn from investments is taxed at the long term capital gains rate? When we put our money in a high interest savings account ^[4], the interest we earn is taxed at 25%. When we get a dividend payment, it’s taxed at 15%.

So, if you want people to save more, why not do something simple like tax interest at the long term rate? Or, not tax the first $x,xxx.xx in interest earned each year? It won’t be a perfect answer to our aversion to saving, as interest rates will adjust to the change in tax treatment, but it will certainly change the mindset of your average citizen. Politicians love to talk about how we should be saving more but they don’t actually take any steps to make it a reality (unless you count ignoring the signs of an insanely “frothy” housing market, over-leveraged financial institutions, etc.).

Sadly, given the recession, this will never happen because while we all inherently know that saving for the future is more sustainable than spending it all today, there’s no way a politician can advocate this while we’re in a recession.

Despite that, I’m curious what you think? Crazy idea?

(Photo: gnerk)