Sunday, November 18, 2007

How to begin: a modest proposal (really!)

When we talk about transforming government, we tend to think about major initiatives: prescription plans from the liberals or the elimination of the Department of Education from conservatives.

How about thinking small for a change. Or for some change?

The savings rate in America is horribly low. I choose to say "savings rate" rather than "investment rate" because I am talking about lower middle class and poor people trying to sock away money for Christmas or to cover the transmission when it blows, not someone setting up a 401k or diversifying a stock portfolio.

So why not stimulate the urge to save, however slightly, by removing the government's disincentive for doing so? Where could we find a sponsor in the General Assembly who would support an income tax exemption on the first $5,000 of interest in bank, credit union, or internet bank savings accounts?

I have an Ing-Direct account that currently pays about 4.2% APY. I sock $25 a week into it, plus any small windfalls that come my way during the course of the year, to have money for Christmas presents. I earn about $4 interest per month. That's roughly $50 a year when you add up the pennies. Not much, but it amounts to an extra two weeks' worth of saving.


In my current tax bracket the US government wants 31% of it, and Delaware wants another 7.7%, which amounts to 38.7% or $19.35 of my interest. So why bother saving it in the first place?

My bet is that by allowing a tax exemption for the first $5,000 in savings' interest, the state of Delaware would lose no more than relative pennies, but the incentive to save would be greatly increased.

This would be a positive piece of Libertarian-oriented legislation: one that supports individual liberty and (however slightly) reduces the flow of tax money to the government.

I frankly think it would be an idea for someone like Jack Markell to champion, but I have my doubts.

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