Tax reform should promote saving among households with less wealth
Treasury secretary Steven Mnuchin has described the objective of the Trump administration’s tax reform proposal as reducing the tax burden on the middle class. Mnuchin has also stated that a tax bill should not add significantly to the deficit, while the administration makes clear it wants to foster saving and economic growth.
But some proposals on the table, like eliminating the estate tax, do little or nothing to blend these objectives. Reforming savings programs for lower- and middle-class families, however, could meet these objectives while boosting wealth among most Americans.
Worsening wealth inequality must be addressed
Wealth inequality in America has grown not only from gains at the top but from declines at the bottom. The racial and age wealth gap has also widened.
Families of color will soon make up a majority of the population, but most continue to fall behind whites in building wealth. In 1963, the average wealth of white families was $121,000 higher than the average wealth of nonwhite families. By 2016, the average wealth of white families was over $700,000 higher than black and Hispanic families. Put another way, white family wealth is seven times greater than black family wealth and five times greater than Hispanic family wealth.
Simple reforms could yield big improvements
Reforms to savings programs would alleviate wealth inequality. Savings programs could be redesigned to expand homeownership and other opportunities for the young, reduce risk from income shortfalls for the middle-aged, and provide greater long-term care protection for the old.
Here’s how. The federal government spends over $400 billion to support asset development, mainly through tax breaks for housing and retirement accounts. Although those subsidies are available to any taxpayer, they mainly benefit high-income families because their value increases with the amount of wealth owned or debt incurred, as well as with the individual’s tax rate. Those at a 0 percent tax rate get no subsidy.
Many of these subsidies fail to promote saving, and in some cases, they favor net dissaving. Consider how the home mortgage interest deduction supports additional borrowing to pay for consumption through refinanced and secondary loans. This ultimately decreases many households’ net home equity—a form of dissaving.
Many reforms could boost middle-class prosperity while helping those who have fallen behind build wealth—and could do so without large revenue losses.
- Limit the mortgage interest tax deduction, and use the revenues to provide a credit for first-time homebuyers.
- Establish automatic savings, and undertake related retirement plan reforms.
- Offer matched savings, such as universal children's savings accounts.
- Reform safety net program asset tests that are sometimes barriers to saving among low-income families.
- Promote emergency savings with incentives linked to savings at tax time.
- Reduce reliance on student loans while supporting success in postsecondary education.
In sum, the administration could meet many of its tax reform objectives and improve, rather than exacerbate, wealth distribution in the economy through improved distribution of current tax subsidies and savings programs.
Carol Heupel feeds the goats on her family farm in Weldona, CO on January 24, 2015. She and her husband, Kurt, grow alfalfa hay and wheat as well as raising Suffolk sheep and Boer goats on their 700 acre farm. The couple said their middle class status is being threatened by government regulations and other costs that eat away at their income and savings. Photo By Craig F. Walker/The Denver Post via Getty Images.