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.

Except....

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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