And we must construct a populist tax package that will take a big slice out of every American’s tax bill? How? The simple answer is: Look to the payroll tax. For about 2-of-every-3 working families in America today, the 15.3 percent FICA tax is the single biggest eraser of worker paychecks. Nowadays a family of four with an income of $25,000 a year, forfeits about $3,750 throughout the year in payroll taxes alone. How can liberal Democrats possibly oppose lifting some of this tax load off the poor?
We hear it said repeatedly of late that Americans have lost their saving ethic. The consumer society, we are told, impels Americans to greedily spend every paycheck as fast as we can earn it. We Americans evidently demand instant gratification, so we spend on every hot new consumer item from Pokemon cards to Porsches.
But this analysis is wrong. The major reason the official U.S. savings rate (a very flawed statistic) has tumbled is not because Americans are behaving selfishly, but rather because our tax system behaves dysfunctionally. If we want Americans to save and invest more, then at the very least our income tax code should stop penalizing these activities.
The federal income tax doubles and in some cases triple taxes Americans who save. First, we tax a worker’s income when it’s earned. Next, if the money is invested rather than instantly consumed, we tax the capital gains on stocks; we tax the income of the businesses that we own the stocks in; if there are dividend payments, the government imposes a levy on those too. We even tax the 3 percent or 4 percent interest income on basic savings accounts. If we are fortunate enough to die with money left over after paying all those other taxes, the tax collector robs the grave by snatching away up to 55 percent of the estate. No wonder one of America’s top-selling financial self-help books advises Americans to “die broke.”
What is maddening is that many of the same Washington pundits who defend these multiple layers of levies, have the audacity to lecture Americans that they aren’t saving enough.
It is to relieve the anti-savings bias in our tax code that Larry Kudlow and I have developed an idea we call “2+2 Savings Accounts.”
There are two parts to the plan. First, every worker would be given the option of diverting 2 percentage points of the employer share of the payroll tax into a personally directed Individual Retirement Account (IRA). Where would the money come from to pay for this? Simple. From the payroll tax surplus, now running at more than $100 billion a year.
For the past 15 years, Congress has made Bonnie and Clyde look like amateur bank robbers by stealing more than $500 billion from trust fund surpluses to spend on other programs in the budget: from honey bee subsidies to peanut butter research to corporate subsidies. The only way to end the looting of the Social Security fund is to place those dollars directly into worker’s retirement accounts.
The second part of the “2+2 Accounts” is to allow every single American worker to place an additional 2 percent of their paycheck into a tax free IRA. (This would be on top of existing IRA allowances.) The money for the IRAs would come from the projected “on-budget” surpluses over the next 10 years.
So under the 2+2 plan, the typical American could lay away 4 percent of his or her paycheck (2 percent from the payroll tax plus 2 percent from a new IRA) in a personal nest egg. Because half the money comes from the payroll tax, even the lowest income families in America could take advantage of my plan. For the first time in their lives, young and low-income workers would have the opportunity to amass real wealth. What better way to give America’s workers - from teachers to construction workers to bus drivers to computer programmers - access to the American dream than by allowing them to build up private equity?
If a couple with a combined income of $30,000 a year takes advantage of the full 4 percent private savings option, then they will be investing $1,200 a year tax free. Thanks to the power of compound interest, if that couple invests $ 1,200 a year from age 22 to age 65, and they earn the average historical rate of return in the stock market, they will retire with nearly $400,000.
Under “2+2” savings accounts workers should be permitted to withdraw money penalty free from these accounts for purposes other than just retirement. Parents should be permitted to draw money from these accounts to pay for education expenditures. Workers should similarly be permitted to take money out of these savings accounts to pay for medical expenditures for themselves, their children, or elderly parents. If workers became temporarily unemployed, they could draw funds from their 2+2 account until they get back on their feet.
Bill Clinton and Al Gore are unshakable in their faith there should be a government agency to solve every problem that families face in America today. The virtue of 2+2 savings accounts is that Americans won’t need to be reliant on the false promises of the government nanny state, because over time these accounts will allow Americans to be financially self-reliant.
Most Americans believe the $2 trillion of tax surpluses over the next 10 years should be used in ways to help future generations. Leaving the money in the hands of fat and happy politicians whose time horizon is only as far off as the next November congressional election, will hardly help our children. Allowing every working American to have the dignity to build up a pool of real personal savings will.