“The policies of the U.S. government reward people who go into debt and spend, and punish people who save. If you borrow a million dollars to buy a McMansion using an interest-only mortgage, you get to deduct the entire amount from your taxable income. If you decide instead to save a thousand dollars a month so that you can pay cash for that McMansion, the government taxes the interest on that savings. It also taxed the money when you first earned it. In short, the government pays Americans to take significant risk and live beyond our means.
“More generally, the government taxes savings but not spending. If you buy a new car, you pay zero federal tax (only local sales tax). The federal government puts no barriers between you and buying a car. If you put $30,000 in the bank instead, you get taxed on your interest, even though that interest is primarily making up for inflation. At the current low interest rates, if you put money into a standard savings account you are actually losing money in real terms every year as a result of inflation and taxes. No wonder people don’t save.
“One big solution is to stop taxing savings, stop paying people for going into debt, and start taxing consumption. Called the ‘fair tax’ by supporters, this tax plan advocates replacing the income tax with a national sales tax. Most proposals allow some nontaxed consumption to make sure that lower-income people are not unfairly taxed. Dismantling the IRS is a tough sell, but the fair tax would reward success instead of punishing it with higher taxes. Taxes would incur only when you consumed goods. As a Democrat with a high mortgage deduction, [this author] came to agree that it is one of the only ways that Americans could be instantly incentivized into savings instead of spending. At the very least, the income tax on savings accounts should be eliminated. Why punish saving? It’s not even cool. But it is beneficial in the long run – otherwise known as the time when even the narcissists wish they hadn’t blown their cash on a BMW.”