Make Savings Tax-Free - Yes, Deductible

Policymakers frequently moan about the low rate of private saving in the United States and its depressing effect on potential economic growth.

They are aiming at the right target, but their aim is badly off. Virtually all of the cures - existing and proposed - involve increasing amounts of complexity in the Internal Revenue Code and greater administrative costs to both the government and to private savers. The time has come to consider a fundamentally different approach.

We can begin by analyzing the existing variety of savings plans which receive special tax treatment -- independent retirement accounts (IRAs), Roth IRAs, Keogh plans, 401(k) plans, and so forth. The common characteristic of all these special tax incentives is that the federal government winds up in effect telling the taxpayer how much to save and what forms the savings can take.

Technically, of course, there is no compulsion. Taxpayers have independent choice. They are "free" to lose these tax benefits if they do not choose to conform to the extremely complicated conditions which Congress has established to govern the amounts they can put in -- or take out - from these tax-deferred accounts and the specific procedures they must follow.

However, each step of the regulated savings process, including just maintaining the balances of the special accounts that must be set up, involves fees and charges. These costs, of course, reduce the net savings available for investment.

Moreover, if taxpayers dare invest any of their saving - and that, of course, is the basic objective justifying the tax incentives - they are faced with additional complications.

If you have any doubt on that score, just examine the byzantine capital gains tax form for 1997, the result of a recent congressional "reform."

Even if you earn $1 million or more a year, you can still have a very simple tax return. All you have to do is to spend all of your money as you earn it; if, by chance, you save any of it, just put it under the mattress. After all, most of the complexity in the individual or family tax return arises if you invest your savings.

My proposal is the essence of simplicity: deregulate the entire savings process.

All saving should be tax free - technically, every taxpayer should be allowed to deduct all of the saving in a year from the income reported. Of course, when taxpayers cash in their investments and spend the proceeds on current consumption, they should pay full taxes on that deferred income. If the money is reinvested, however, it is still part of the national pool of savings and should generate no immediate tax liability.

This proposed deregulation of savings would eliminate a great amount of expensive and burdensome paperwork. At present, taxpayers younger than 59-1/2 years of age who want to draw any of their retirement savings (say, for a down payment on a house) are likely to be penalized. Also, when they reach 70-1/2, taxpayers have to check their retirement accounts carefully. They may be subject to stiff penalties if they do not withdraw at least the amount the government thinks they ought to.

There are many other complications that savings deregulation would eliminate. For example, under present tax law, the amount that an employer can place in the tax-deferred retirement account of one employee is limited by the decisions of other employees to participate in the savings plan.

Specifically, if a substantial number of young, unmarried employees voluntarily choose not to participate in an employer-sponsored retirement savings plan, that usually restricts the amount that the employer can contribute to the accounts of other - typically older and more highly paid - employees.

The answer surely is not to try to amend each and every provision of the Internal Revenue Code that affects individual savings decisions.

Rather, Congress should deregulate the entire savings process simply by letting all taxpayers enjoy tax deferment on all of their savings - whether they put the money in a bank, buy stocks and bonds, or invest in their own business.

We can think of all the trees that will be saved as a result of the sharply reduced paperwork requirements.

* Murray Weidenbaum is chairman of the Center for the Study of American Business at Washington University in St. Louis.