The U.S. tax system, with its focus on retirement savings and other narrowly defined categories, often leaves many forms of saving at a disadvantage. This approach, which primarily benefits high-income earners, subjects many categories of saving to double taxation. This includes saving for emergencies, buying a home, starting a family or a business, or any of the other reasons people choose to save for the future.
Other countries, such as Canada and the UK, have found a simpler solution that is more widely available and useful, boosting savings and financial security for households across the income scale. Universal savings accounts (USAs) are tax-advantaged savings vehicles with unrestricted use of funds, allowing participants to save for any reason without penalty or excessive paperwork.
A recent study simulated a Canada-style USA in the U.S., paid for by removing the tax advantages of health savings accounts (HSAs). The findings suggest that this reform would be fiscally responsible, reducing deficits in the short run, while simplifying the tax code, reducing compliance costs, shifting the benefits toward low- and middle-income households, and boosting financial security for these households over the long run.
The current federal tax code generally discourages saving, since the income tax applies once to wages and then again to the return on wages that are saved. By contrast, there is no additional tax on wages that are consumed rather than saved. To offset this effect, the tax code contains a patchwork of preferences for saving with complicated rules that generally benefit higher-income households.
Current law provides at least 11 different types of tax-advantaged saving vehicles, each with a variety of rules and limitations. Other countries have found a simpler solution that is more widely available and useful, boosting savings for households across the income scale. Universal savings accounts (USAs) are tax-advantaged savings vehicles with unrestricted use of funds, allowing participants to save for a variety of reasons including retirement, education, housing, health, unemployment, and emergencies.
In this study, the researchers reviewed the current law tax-advantaged saving options and their effects, then analyzed in more detail the experience of USAs in Canada and the UK. Lastly, they used the Tax Foundation Taxes and Growth Model to simulate a policy in the U.S. of a Canada-style USA financed by ending tax preferences for contributions to health savings accounts. The findings suggest that this would increase tax revenue over the next decade, simplify the tax code, shift benefits to lower-income households, and boost saving among low- and middle-income households.
In conclusion, the current U.S. tax system, with its complex rules and limitations, often leaves many categories of saving at a disadvantage. Universal Savings Accounts (USAs), similar to those in Canada and the UK, could provide a simpler and more equitable solution. This approach could potentially boost savings and financial security for households across the income scale, while also simplifying the tax code and reducing compliance costs.