Are Tax-Free Savings Accounts Contagious?
Obamaâ€™s speech to Congress laid out an excellent agenda: substantial investments in renewable electricity, healthcare reform without delay, increased education spending, enforced limits on carbon emissions and the end ofÂ Bush tax cuts for Americans making more than $250,000.
However, there was one bug, which I fear the President may have caught on his recent visit to Canada: “creating tax-free universal savings accounts for all Americans.” One cannot reject this proposal before having seen the details, but it sounds like the leading gimmick from the Conservative governmentâ€™s 2008 budget.
This blogâ€™s critique of Canadian Tax-Free Savings Accounts may also apply to Obamaâ€™s proposal. Such accounts exempt from taxation investment income on a defined amount of private savings. To gain any benefit, one must have enough income to save and then collect a positive return (as opposed to an investment loss) on those savings.
By far the greatest beneficiaries would be Americans with spare savings over and above the amount eligible for contribution to a 401(k). For example, those making more than $250,000 would be well-positioned to take advantage of additional tax breaks for private savings. Therefore, such breaks could undo some of the progressive effect of Obamaâ€™s other tax changes.
AnotherÂ major issue is that, thanks to the magic of compound interest, the cost of tax-free savings accounts (in terms of lost government revenue) is likely to grow exponentially over time. There could be some tension between these accounts and Obamaâ€™s pledge to balance the budget in the longer term.