CRS: Tax Breaks Don't Drive Savings

June 22, 2006 ( - As public debate continues on how best to encourage Americans to save more, a new report asserted that one thing isn't likely to spur more saving: tax incentives.

According to the Congressional Research Service (CRS) report “Savings Incentives: What May Work, What May Not,” incentives may actually cut public savings while causing the federal deficit to balloon, BNA reported. Such incentives benefit higher income individuals and families much more than those with lower incomes, as well as lower income individuals and families.

“The long term net effect on national saving and economic growth is likely negative,” the report asserted.

Higher income individuals, who the CRS pointed out are much more likely to save in the first place, face higher marginal tax rates and benefit more from sheltering income from taxation, the report said. Not only that, but the tax revenue loss from these incentives lowers public saving by reducing the budget surplus or increasing the budget deficit.

The report noted that back-loaded plans cut out the immediate reward to saving and the need to save for future tax liabilities, according to BNA. Consequently, shifting from front-loaded to back-loaded savings approaches may reduce personal savings.

In addition, the resulting long-term revenue loss from these proposals could be substantial, leading to a large reduction in public saving, according to the report. The result of these savings proposals could be a large reduction in national saving and a reduction in economic growth.

To overcome many Americans’ natural reluctance to save, the government currently offers a variety of saving incentives, most of them through the tax system, according to the report. For fiscal 2006, these tax incentives are estimated to cost the US Treasury $125.6 billion in forgone tax revenues, almost 40% of the estimated fiscal 2006 budget deficit.

Current tax incentives appear to be relatively ineffective in inducing new saving – many of the families benefiting are probably shifting funds from other saving accounts into the tax-preferred accounts, according to the report. Consequently, public saving is lower because of forgone tax revenues, a result of tax incentives, while personal saving may be only slightly beefed up at best.