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Lower Tax Rate on Savings Accounts to Incentivize Saving

Posted By Jim On 01/05/2011 @ 7:21 am In Personal Finance | 20 Comments

Over the break, I read about the winning idea [3] for the TIAA-CREF’s Raise the Rate competition and was surprised that it was selected as the winner. I’m surprised because I wouldn’t think that savings would be a reliable factor in the probability that you would default, which is what the credit score is designed to measure, and because it would be a bit of a bear to implement.

My submission was to lower the tax rate you paid on the interest you earned from savings account. You already receive this information as a 1099-INT, so the IRS already knows this is interest earned from an interest bearing account. While it would fail the “difficult to implement” test (which we don’t know if it was factored), I bet you more people would save money if they knew they would be taxed less on the interest. (Many people invest in dividend yielding stocks for this very reason)

I’d go as far as to say you get the first $X in interest tax free. You can set that at $500, $1,000, or higher. People respond to financial incentives and removing the tax would give people an incentive, but unfortunately, at least right now, it goes against the government’s goals of wanting to boost consumer spending.

While less “novel,” I thought the people’s choice winner’s idea of creating a Women’s Savings Club would be more effective at increasing people’s savings rate.

Integrating savings rate into your credit score is certainly novel and interesting, especially since it’s already being factored in by lenders, but I don’t think it will increase people’s saving. Do you?


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[3] winning idea: http://bucks.blogs.nytimes.com/2010/12/19/the-winning-idea-to-raise-the-savings-rate/

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