Friday, October 12, 2012
Democracy: A Journal of Ideas: Tax Policy: Spreading the Benefits More Widely, by Bob Annibale (Global Director of Microfinance, Citigroup) & Wade Henderson (President & CEO, The Leadership Conference on Civil and Human Rights):
Whatever our individual circumstances, having savings is critical to achieving financial security. But this is especially true of the poor. According to the Federal Reserve, only one-third of families on very low incomes (less than $20,291) saved any of their income in 2007. This compares to almost 60% of households on incomes between $39,000 and $62,000 that managed to save something. Encouraging savings and providing the necessary tax incentives and financial products to put some money away is critical up and down the income ladder, but especially on the lower rungs.
Federal policies to encourage savings and asset building are already myriad, from tax-advantaged retirement savings plans to tax credits associated with college savings. These policies are excellent—but most of them primarily benefit higher-income taxpayers. For instance, the top fifth of the nation’s earners receive an estimated 80% of all of the tax benefits from 401(k)s and other qualified pension plans. In addition, 40% of families earning $100,000 or more use a 529 plan to save for their child’s education, compared to only 9% of families earning less than $35,000 per year.
What exists to help those at lower income levels? Chiefly, the earned-income tax credit (EITC). Since its introduction in 1975, the EITC, a refundable credit available to low- and moderate-income working taxpayers, has been one of our nation’s most effective anti-poverty policies. In 2011 alone, working people and their families received $59 billion in EITC refunds.
But this powerful anti-poverty program can do even more: It also has the potential to promote asset building and financial security for low-income families by being linked to long-term savings products. In the same way that retirement and college-savings programs have been effective at promoting and supporting savings for those with higher incomes, the EITC can serve as the basis for asset building for families with lower incomes by linking refunds to automated and incentivized savings opportunities. The result would be a powerful new way to spur positive financial behavior for millions of economically vulnerable families.