Remove Taxes on Savings?
For a while I have thought this was a no brainier. Why is it that interest from bonds (ignore those right now) and savings/checking accounts are taxed at full income tax rates? While dividends and capital gains are taxed at a much lower rate?
I have thought for a while that it was dumb to have the lowest earning types of savings (best I have right now is 4%, much less at most banks) to be taxed at the highest rate available. Where do people save first? Their 3-6Month emergency fund! Which should always be liquid in 24 hours in some form of Money Market with FDIC. If you want to know how to find these shoot me a message. The first account parents open for their kids is a savings account. Now while most children don’t have income up to the standard deduction, if they did should a child’s first savings be taxed at income tax rates? In the child’s case yes, because the first tax bracket starts at 10%.
I have been saving cash, mostly because I have kept my living arrangements low key, so while I have a “big boy” job my expenses are still “collage kid”. This cash is to be used for a wedding, a house, decent furniture when I get tired of the stuff I have accumulated (mis-matched couches?). The interest I earn on that is taxed at my full income tax rates. That is the little I get paid on my savings is taxed as though it is income. True I could spend it as income, but people not saving (why save, inflation will kill it anyway?) is part of the reason the sky is falling all over the news. So I always have thought that there should be no taxes on savings (bank savings) to encourage people to have some savings around. Today though I changed my mind, here is why.
I found my self falling into the trap 99% of the public and politicians fall into. That is “let us change this one thing, everything else will stay the same”. This is dumb on my part. The current rates paid on savings includes expected taxes. For example on my best MMA (Money Market Account) I am making 4.00% APR (www.dollarsavingsdirect.com) which because I am right in the middle of the 25% bracket means I am making after taxes 3.00% which after historical expected inflation is -0-. That is right, I find the best I can make to come out even. So I would expect, if taxes were eliminated, over the next few years in the same inflation environment 3.00% on my cash. What this really means is I expect inflation at best.
Point is, because tweaking some law looks like a good idea, for those like me who save because they should and is the right thing to do right now. Not all things will be equal. To assume nothing else will change. “4% is great if I didn’t have to send 25% of it to congress to waste”, won’t work out that way. The same will apply to bond rates. Now maybe you would want to effeminate taxes because these rates are baked into everything that borrows money. Car loans have higher rates because the person buying the bond (loaning you the money) has to pay taxes and will only take that bond if they can make their taxes. Same goes for school loans, house loans etc. So maybe again eliminating taxes on interest isn’t a bad idea. Oh wait, but if you do that, then why take the risk in stocks? If your just going to pay some of that in taxes, the stocks minus bonds rate will be smaller, net of taxes. So now people are all buying bonds and not providing companies with capital they need to make jobs.
The next time someone says they have all the reasons why changing taxes will be great, punch them (including me, because I still hate our tax system), because they have no idea what all the other 300+ Million Americans are going to do to compensate for that.
Note I mention a car loan above, I in no way encourage anyone to ever take a loan or lease a car. I think mathematically it is a good way to keep your self from getting ahead. When an auto company is making more on leases than the product, be worried.
