Here’s a piece from the Economist’s Buttonwood blog on the West’s savings problem: people simple simply do not save enough. That’s true enough. With striking exceptions in certain countries, they don’t. There are plenty of reasons for this, but the author passes too lightly over the disincentive role played by taxation, simply noting:
The tax system varies from country to country, but it is quite common for interest payments to be tax deductible while interest receipts are not. Indeed, it is hardly surprising that many people view their houses as their nest eggs, since in addition to interest deductibility (in the US at least), capital gains on the main home are free of tax. This distortion to the system is very hard to remove once in place.
The argument about the distortion caused by the tax deductibility of mortgage interest is a familiar one in the Economist, a magazine based in a country where mortgage interest is no longer tax deductible. Oddly, however, its journalists rarely get round to questioning the fact that capital gains from the sale of a principal private residence are taxed in the US (albeit with exemptions). Nor do they mention the fact that (at least in urban and suburban America) property taxes may well be significantly higher than in Europe.
Like it or not, a house is a form of saving and, at the very least, any capital gains levied on its sale should only be taxed on an inflation-adjusted basis (if at all), a principle that should ideally be extended to all capital gains and, if interest on savings is to be taxed, to that too. If, net of tax and inflation, the real rate of return on saving is negative, that’s hardly the most compelling argument to go in for it.
And how might these tax “breaks” (we could debate the term) be paid for? Well, how about doing more to shift a higher percentage of taxation away from income and onto consumption. I believe there’s a handy tax called VAT that might just help do that.
Also avoided is one other point well worth mentioning in the light of current debates. To what extent would the means testing of social security (and Medicare) entitlements operate as a disincentive to save? Quite a bit, I reckon.