The Hill's Congress Blog
Tax commission co-chairs right to prioritize analysis of tax expenditures
By Robert Friedman & Eugene Steuerle
November 29, 2010
Dear Government We Deserve Subscribers,
The President's debt commission has recently proposed dramatically reducing tax expenditures as one way to reduce the deficit. In a recent op-ed, Robert Friedman, chair of the Corporation for Enterprise Development, and I point out that Congress could take the hundreds of billions of dollars spent each year on saving incentives and spend significantly less on them, while encouraging more saving and better protecting low- and middle-income households.
Hope you'll find it interesting.
The American Dream has long meant the opportunity to buy a home, save for retirement, go to college, start a business and build an economic future for oneself and one's family. Small wonder that the federal government plans to spend $4 trillion during the coming decade to try to help us invest in our future. But, as noted by the co-chairs of the National Commission on Fiscal Responsibility and Reform, we're pursuing this shared dream in ways that have become wasteful, regressive and ineffective. We recommend rebalancing our budget. We could cut the national debt by $500 billion or more over a decade, provide more effective subsidies for middle- and low-income families, boost private saving and reduce the demands on our welfare system. We could be on our way to a true "save and invest" economy.
First, some numbers. In 2009, the federal government spent nearly $400 billion to encourage saving and investing by American families, mostly through the tax code. A recent report, Upside Down: The $400 Billion Federal Asset-Building Budget, from CFED and the Annie E. Casey Foundation shows that current subsidies range from $95,000 for the top 1 percent of households to less than $5 for those at the bottom. Urban-Brookings Tax Policy Center research shows that many subsidies rise in value as wealth and tax rates increase. That basically insures that the poorest fifth of the population won't even qualify for many of them.
These subsidies reward shuffling money and making the "right" type of deposit rather than increasing net saving. Upper-income taxpayers can easily get tax breaks by moving money between accounts. In some recent years, government spent more on saving incentives than people saved!
To top it off, our laws effectively tell low-and middle-income families that they can get more government support for everything from college to welfare by saving and working less.
While we favor government support for homeownership, existing incentives have intensified the recent homeownership crisis. They reward the McMansion and the empty vacation home more than the average place to live, and they put too much emphasis on debt accumulation relative to ownership. These incentives can drive prices up and ownership opportunities down for those with modest incomes.
Now is the time to scale back these ineffective incentives and try lower-cost alternatives more likely to boost savings.
How? Research shows that low-income and poor families will save, go to college, start businesses, buy and maintain homes and save for their retirement.
In one study, families living at half the poverty line (about $11,000 for a family of four) saved at about the same level, and two to three times the rate, of those living at twice the poverty line. Accumulating even a few thousand dollars makes life easier and ramps up aspirations, goals, and efforts. Children with savings earmarked for education are seven times more likely to attend and complete college than those without such funds.
These trends are converging to create a monumental opportunity to both lower long-term deficits and raise net private savings. For starters, let's cut the overall federal asset budget by at least $100 billion a year, and, counting reduced interest costs, save well over $1 trillion over 10 years once fully phased-in.
Simultaneously, let's reallocate half the savings toward incentives that target low- and middle-income families and reward their saving. Congress could more effectively promote retirement savings to 50 million low and middle-income taxpayers through an expanded Saver's Credit for deposits to retirement accounts and sweeten the deal for employer and employee groups that contribute some minimum percentage of compensation to the retirement plans of most workers. Congress could offer a much better designed homebuyers credit that rewards continual home equity build-up for those willing to forego other tax deductions. And, Congress must take seriously the education of our youth by getting every kid into a saving account for college, and scrapping the excessive penalties for savings engrained in Pell grants, welfare and some other social insurance programs.
With debt swelling and government's pro-saving policy on the blink, promoting real private savings while reducing public spending could turn a double whammy into a two-fer.
Robert Friedman is the founder and board chair of CFED (Corporation for Enterprise Development). CFED expands economic opportunity by helping Americans start and grow businesses, go to college, own a home and save for their children's and own economic futures. Established in 1979 as the Corporation for Enterprise Development, CFED works nationally and internationally through its offices in Washington, D.C.; Durham, N.C.; and San Francisco, Calif.
Eugene Steuerle holds the Richard B. Fisher Chair at the Urban Institute in Washington, D.C. and writes the on-line column "The Government We Deserve."