Are Tax-Free Savings Accounts Contagious?

Obama’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 of 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 government’s 2008 budget.

This blog’s critique of Canadian Tax-Free Savings Accounts may also apply to Obama’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 Obama’s other tax changes.

Another 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 Obama’s pledge to balance the budget in the longer term.

6 comments

  • Bill Clinton proposed the “universal savings accounts in 1999.”
    George Bush proposed them in 2000.
    Barak Obama proposed them in 2009.

    Doesn’t seem to be matter what party they are in.
    Makes you wonder who is really pushing this idea?

  • The roots of TFSAs are in academia, and are aimed at increasing saving because increased savings lead to more investment and lower interest rates. Unfortunately, this “loanable funds” view of how financial markets work is incorrect, as it does not consider the primary role of investment supported by credit creation by banks, nor the relatively small amount of household savings relative to total investment. Yet, this model still is at the heart of way too many conventional analyses.

    It is true that total savings must equal total investment as an accounting identity (new investment equals new assets which must be owned by someone) but this has been misconceived as savings causes investment.

  • Another major issue is that, thanks to the magic of compound interest, the cost of tax-free savings accounts (in terms of gains personal revenue) is likely to grow exponentially over time. Leading to New Innovations in Businesses, Jobs, Production, Consumer Goods, Services through available funds. It really is more of a gift based off Canadian philosophy. In a hyperbole its the government saying “Canadians keep your hard earned money & use it yourself”. It all comes down to the Invisible Hand or Iron Fist addage.

    Also an analysis at a macroeconomic level, it acts much more efficient & effective BAILOUT then any other current proposed program, it rewards those who save & especially invest without targeting or penalising anyone.

    These bailouts today have rewarded Failure over Sucess, and We can already see the psychological damage done to society, not including the competitive disadvantage it placed on successful companies. TFSA if anything will remerge the small entrepreneur.

  • Withal, there was one bug, which I prize the Chairman may know caught on his recent stay to Canada: “creating tax-free coupler fund accounts for all Americans.” One cannot scorn this offer before having seen the information, but it sounds suchlike the prima twist from the Materialistic government’s 2008 budget.
    =============
    ruthallen

  • In fact, the U.S. had Roth IRA’s (analog of TFSA’s) _before_ Canada had TFSA’s. There was originally an income cap above which they couldn’t be used, but that fell off at the start of 2010.

  • The people are loosing their moral while becoming modern. The society needs to be attentive that moral value.

    Savings
    *******
    Steve

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