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Thursday, April 12, 2012

The IRS as a Savings Tool

Don't CutWall Street Journal, IRS Enlists Tax Day to Push Consumers to Save, by David Wessel:

For many Americans, Tax Day—April 17, this year—means writing a check. For most it means a refund. Last year, the Internal Revenue Service refunded $300 billion, or 25 cents for every $1 it collected. More than 80% of the 143 million returns filed resulted in a refund.

Paying more in taxes during the year than one actually owes amounts to an interest-free loan to the government. Economists used to consider it irrational: The smart thing to do is reduce withholding to come close to matching one's tax obligation.

But new evidence—and insights from behavioral economists—challenge that view and suggest that many people, particularly lower-income Americans, use the tax system to force themselves to save. Now, the government is looking for ways to take advantage of what Mark Iwry, the Treasury point man on saving and retirement issues, calls "savable moments." ...

Two years ago, the IRS began asking taxpayers if they wanted to use some or all of their refund to buy a U.S. savings bond. Last year, about 30,000 people bought $11.5 million in savings bonds. The program is very small, but growing. So far this year, sales are running 60% above year-ago levels. While the Treasury is doing away with paper savings bonds for everyone else, it has made an exception for these savers, figuring making the savings tangible is important.

The goal is "to create as many avenues as possible to make it easier to save," Mr. Iwry says. "Someone who begins saving at least part of their tax refund might acquire the habit and start saving in other ways as well."

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