“A penny saved is a penny earned.”
— Benjamin Franklin

by Rod D. Martin
August 9, 2004

Everyone agrees that personal savings is essential, for families and for our economy.

So why do we tax savings?

A tax acts as a penalty. A capital gains tax, for example, penalizes capital formation or investing. A tax on savings discourages people from squirreling their money away, precisely what we want to encourage.

Put another way, when you tax something, you get less of it.

And just to make matters worse, when John Kerry and his Beltway buzzards swoop down on your savings, they’re taxing money they’ve already taxed. Not content with chowing down on your paycheck, Uncle Sam arrives for seconds, devouring your return on what’s left.

In my series of articles on why America needs a flat tax, I’ve suggested five key changes that must be made if we’re ever going to escape the blood-sucking horrors of double taxation. But on one point, the President is way ahead of everyone.

Earlier this year, President Bush introduced a step-by-step battle plan designed to shut down taxation of savings and inaugurate a new “Ownership Society,” whereby tax-free savings will lead to true wealth accumulation for every American.

The President proposed four new savings vehicles, meant both to simply the current alphabet soup of programs, and to greatly increase the number of Americans with a retirement plan: Retirement Savings Accounts (RSAs), Employer Retirement Savings Accounts (ERSAs), Individual Development Accounts (IDAs), and Lifetime Savings Accounts (LSAs).

RSAs would replace all three kinds of IRAs currently available. As with Roth IRAs, contributions would be made on an after-tax basis. All withdrawals would be free of taxation if taken after age 58. Irrespective of income level, everyone could contribute up to $5000 per year, and that would be indexed for inflation.

ERSAs are designed to convert current employer-sponsored defined contribution retirement plans — 401(k)s, SIMPLE 401(k)s, 403(b)s, governmental 457s, SARSEPs, and SIMPLE IRAs — into a simple, single, uniform new savings vehicle.

This new plan would be much easier for employers and employees alike. It would especially help small business owners, who employ the lion’s share of America’s workforce. Most don’t offer employees retirement plans because they simply can’t afford the time or money needed to comply with all the daunting regulations. By slashing red tape, ERSAs would enable small businesses to offer retirement plans like never before.

IDAs, the third new proposed savings vehicle, are meant to encourage lower-income Americans to save. Single filers with incomes below $20,000, and joint filers with incomes below $40,000, would be eligible, as well as household heads with incomes below $30,000.

What’s unique about IDAs is the tremendous incentive of a dollar-for-dollar matching contribution of up to $500 a year from either a government-approved agency or a sponsoring financial institution. Uncle Sam would reimburse those sponsors, who’d be required to provide savers with financial education.

Last — but hardly least — are the proposed LSAs; and here’s where it really gets interesting. LSAs are exactly like RSAs, but with one additional feature: LSAs will operate just like totally liquid checking or savings accounts. You’ll be able to withdraw the money whenever you please, and for any reason you choose.

This is revolutionary: with this withdrawal-on-demand provision, LSAs, if passed, will take the place of the older, taxable retirement accounts for millions of Americans. They will give Americans the first vehicle for completely tax-free savings in almost a century.

Coupled with the President’s other three proposals, LSAs will mean a radical expansion of the number of savers and of the amount they save. And as economists remind us daily, this will mean more investment, greater capital accumulation, and much higher living standards for everyone.

And, of course, LSAs will also move us further away from yesterday’s failed welfare state and toward becoming a responsibility-based Ownership Society.

The President’s plan hardly ends here: his Health Savings Accounts are already moving health care in this direction, with complete personal control and tax-exemption. And his planned personal Social Security accounts will give everyone the benefits many have already tasted through their IRAs and 401(k)s.

But now, with this impressive combination of retirement-plan simplification and true tax-free savings, it’s full speed ahead, to a new era for savings, but also to a new age in which every American owns and controls his or her own share of real wealth.

Needless to say, John Kerry, Teddy Kennedy and all their friends hate all of this: it transfers too much power from government straight to you.

Don’t let them derail it. Tell your senators and representatives to support the President or get out of the way. Find out where they stand on the taxation of savings and the dream of ownership. And this November, remember what you’ve heard — and vote accordingly.

For the sake of our children and our children’s children, let’s get behind the President’s dream.


Read the Whole Flat Tax Series, by Rod Martin

1. 1/9/2004, “Tax Reform for the New Century”

2. 2/13/2004, “Making Real Tax Reform a Reality”

3. 3/4/2004, “Abolish the Capital Gains Tax”

4. 4/5/2004, “Abolish the Alternative Minimum Tax (AMT)”

5. 7/15/2004, “Nothing Certain But Death and Taxes”

6. 8/9/2004, “What America Needs is Real Tax-Free Savings”

7. 9/5/2004, “Full Business Expensing: JFK’s Plan and Ours”