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A Tax Reform We Can All Support

May 11, 2015 in Economics

By Chris Edwards

Chris Edwards

Tax reform will be a key Republican theme going into the 2016 elections, but Republicans divide over the needed changes. Pro-growth conservatives and libertarians favor broad-based tax rate cuts, while conservative and moderate “reformicons” favor expanded social policy breaks, such as child tax credits.

U.S. law overemphasizes helping favored groups with narrow tax breaks. Here’s a better idea.”

The tax divide is important because the next president will likely be a Republican, and he or she will probably push for a first-year tax cut, as Ronald Reagan and George W. Bush did. Reagan’s 1981 tax cuts were all pro-growth. Bush’s 2001 tax cuts were partly pro-growth and partly social policy, as were the 1997 tax cuts under Bill Clinton.

Looking ahead to 2016, one reform idea that should appeal to all types of Republicans—and even some Democrats—is universal savings accounts (USAs). Such accounts would be like Roth Individual Retirement Accounts (IRAs), but for all types of savings, not just retirement savings. People would contribute after-tax income to USAs, and then all earnings and withdrawals would be completely tax-free.

Consider Canadian and British Success

USAs would be great social policy, as they would help families build larger nest eggs, and they would be great economic policy, since savings fuels investment and growth. The accounts would be good politics, as well, as we have seen with the success of USA-style accounts in Canada and Britain.

Let’s look at Canada first. Prime Minister Stephen Harper’s government implemented Tax-Free Savings Accounts (TFSAs) in 2009, and they are creating a broad-based savings revolution north or the border. Here are the key features of the accounts:

  • Annual contribution limit of $10,000. Portions of the contribution limit not used in a year can be carried forward to future years.
  • Tax-free earnings. All earnings are tax-free and withdrawals can be made at any time for any reason, with no taxes or penalties. This feature greatly simplifies the accounts and increases liquidity, both of which encourage added savings.
  • No income limits. All adults can contribute to the accounts and withdraw from them at any time during their lives.
  • Ease of saving. Accounts can be opened at any bank branch or online, and they can hold bank deposits, stocks, bonds, mutual funds, and other types of assets.

TFSAs are great for all types of saving—saving to buy a home or a car, or saving to cover health expenses, unemployment, or retirement. That is about as …read more

Source: OP-EDS

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