As it would with any policy, an analysis of saving incentives must begin with an accurate identification of the goals they attempt to achieve. Saving incentives aim to influence individuals' decisions about how to allocate their income, mainly encouraging them to make deposits to savings accounts rather than to spend it for consumption. The goal, however, is not to increase net savings for the sake of increasing net savings, much less to increase gross deposits in accounts. The goal is economic growth, increased productivity, and greater well-being for our children. Likewise, when some experts lament the low rate of national saving, they do so because of the fear that low saving will constrict future productivity and economic growth. To the extent there is a demon, it is not low saving, but low growth.
We too favor economic growth and would like to adopt policies that promote it. Some of these policies also would increase the amount of saving available for private investment. But the policies we favor are serious ones, such as decreasing the size of the federal deficit. We do not favor most saving incentives because they are political sops that actually decrease net saving in the economy and, more importantly, derail us from the harder tasks that lie before us.
Saving incentives are as old as taxes. Many provisions in the U.S. tax code that relate to capital income are believed to operate as incentives for saving and investment. These include special treatment of pensions, individual retirement accounts (IRAs), retirement accounts for the self-employed (Keogh plans), employee stock option plans, thrift and profit-sharing plans; accelerated depreciation, research and development tax credits, and special treatment of intangible drilling costs; and deferral or exclusion from tax of income from life insurance, individual annuities, and education savings bonds.
Whether in times of relative prosperity or stagnation, it is often argued that such incentives are cheap mechanisms that spur economic growth. Because they are not extended to the largest source of income - labor income - they are less costly than other forms of tax reduction or expenditure increase. Many incentives are designed to further minimize cost, for example, by applying only to “new” capital investment or “new” deposits in savings institutions. Most studies, however, have not demonstrated a strong connection between the adoption of saving and investment incentives and the generation of economic growth.
There are several reasons for the demonstrable failure of past government incentives to promote economic growth. The first has nothing to do with whether or not saving and investment incentives successfully increase net savings and investment. To be sure, investment and saving are essential elements of economic growth. They are means by which a society ensures a more productive tomorrow, in which there is more output to be enjoyed by everyone. But they are not the only, nor even the principal, means.
Many government policies affect growth in the economy. The way in which government organizes and designs its expenditures and taxes, as well as the ways in which it promotes or impedes competitive conditions in the marketplace, are important influences on economic growth. Economic growth, however, is created primarily by hard work, inventiveness and innovation, technological change, the formation of new ideas, and the application of
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