Universal Savings Accounts: Designing Tax Incentives that Pay to Save

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[00:00:00] Joe Selvaggi: This is Hubwonk. I’m Joe Selvaggi. Welcome to Hubwonk, a podcast of Pioneer Institute, a think tank in Boston. Each of us faces a choice with our income or assets. Should we use them to consume today or delay that consumption to save or invest for the future? The reward for delayed consumption comes in the form of interest on cash or returns on investments.

[00:00:25] However, taxes assessed on delayed consumption, specifically those that target income from investments. Reduce the reward and therefore the incentive to save. Our tax code acknowledges how tax burdens can discourage savings by offering tax preferred savings accounts for education expenses and individual retirement plans.

[00:00:46] But given that saving and investing for the future can offer myriad benefits beyond education or retirement, are there ways our tax code could go further to encourage everyone to save more by simply taxing us less for doing so? My guest today is Dr. Adam Michel, Director of Tax Policy Studies at the Cato Institute.

[00:01:07] Dr. Michel has written extensively on this topic and recently testified before the Senate Finance Committee on the idea of universal savings accounts. Building on the success of programs like 401ks and 529 plans in encouraging retirement and education savings, Dr. Michel makes a persuasive case that our tax code could do more to reduce the tax penalties on savings.

[00:01:31] His research highlights the success of similar programs in the U. K. and Canada, which have encouraged greater individual savings across all income levels. He will explain how our current system may tax the same invested dollar on as many as three separate levels. and how a program modeled on existing qualified accounts could serve as a model for a broader, more inclusive saving program for all Americans.

[00:01:55] When I return, I’ll be joined by Cato Institute’s Director of Tax Policy Studies, Dr. Adam Mischel. Okay, we’re back. This is Hubwonk. I’m Joe Selvaggi and I’m now pleased to be joined by the Director of Tax Policy Studies at Cato Institute, Dr. Adam Mischel. Welcome back to Hubwonk, Adam. Thanks for having me back on.

[00:02:13] Okay, well, great to have you back. Last time we talked about the, frankly, many of the myths that surround how we got here with debt and deficits,it was, I would say it might have been a more gloomy, conversation. I’d like this conversation to be a little more, more upbeat. I want to talk about the positive.

[00:02:28] aspects of testimony you gave to Congress, I think, a week or maybe a week and a half ago, talking about some very exciting ideas that piqued my interest and made me think a little bit about, how, we could improve our tax policy. but before we get into the future, you, I read a piece, that you wrote recently about,a rather large tax increase that is in store for all of us next year in 2025.

[00:02:51] I thought it might be a good place to start a conversation, to talk about, the expiration of some tax changes that are due to expire in 2025. What should our listeners know about this imminent potential tax increase?

[00:03:07] Adam N. Michel: Yeah, so this is going to be the big thing that drives the congressional fiscal conversation over the next couple of years.

[00:03:14] At the end of 2025, so beginning in 2026, the 2017 tax cuts that were signed into law, under President Trump, Almost entirely expire. The, especially the all of the provisions for individuals, expire going raising taxes on basically every single American. It’s about a 450 billion dollar tax increase, each year,beyond that 2025 point, which works out to about a two to three thousand dollar tax increase in your sort of typical taxpayer.

[00:03:44] that sort of individual tax cuts, obviously mean. Less money for people are going to have in their pockets, but there’s also some expiring business provisions and all of this sort of wrapped up together also means that the economy will be growing slower. There’ll be sort of additional headwinds on business investment on sort of people’s incentive to work and so keeping those tax rates low will be will be a key priority.

[00:04:08] I think in the next couple of coming years.

[00:04:11] Joe Selvaggi: Again, not to beat this too much, I want to move on to our topic, but, we’ve covered both with you and other guests on this show, the fact is, as a percent of GDP, revenue’s never been better. We’re up around 19%. So the government’s taking more of America’s money than ever before.

[00:04:24] I think tax cuts is a bit of a misnomer. I think it’s often to trim back the creep of, taxes as we, our incomes go up. So we all stumble into higher brackets and pay more in tax. I think it was tax cuts really just Hold the ground of the average consumer and taxpayer, where they are.

[00:04:42] Which of the tax cuts that you see expiring or potentially expiring, if we don’t do something about it, might be, in your view, the most harmful to the economy and ordinary Americans?

[00:04:51] Adam N. Michel: So the most harmful, expirations for economic growth are those that impact business. investment. Investment is, I think as we’ll talk about a little bit more in this conversation. Investment is really key to economic growth, to pro to, increased wages because of additional, productive, productivity in the economy. And so there, there’s a provision called. Full business expensing. It gets a little technical, but it essentially allows businesses to write off the investments that they’re making in the year they make them, and, and that is all actually currently expiring and fully expires at the end of 2026.

[00:05:24] The, on the individual side, The top marginal tax rates jump back up to 39. 6 percent from 37. That will have some, that hits a lot of small and medium sized businesses that pay their taxes as individuals. When you factor in sort of state and local, individual taxes, we’re already, many states, I think it’s something like 10 states, are already on the wrong side of the Laffer curve, this sort of top, the revenue maximizing rate. And so letting those tax rates come back up even higher, which pushes more states into people, more people living in more states, into the category, into the sort of realm of, tax rates being so high, they’re damaging more economic activity and actually lowering, revenue to the government rather than, increasing it.

[00:06:08] Joe Selvaggi: Okay, well that’s going to be the end of our Doomcasting for the show. We’re going to change our view of, instead of bashing taxes, let’s talk about how tax policy might be used to help everyone. The economy, individuals, presumably that will all redounce to the benefit of government revenue in the end.

[00:06:24] So let’s start by talking about some of the themes in your recent congressional testimony, where you talk about incentives to encourage Americans to save more. Why should, in the most basic level, why should the government care about individual savings? Why should we want to encourage, collectively, individual savings?

[00:06:47] Adam N. Michel: Yeah, that’s a sort of, it’s a great place to start, and I think just to level set a little bit, I don’t think the government should be encouraging anyone to save, but we also shouldn’t be penalizing people from savings. We want government policy to be neutral towards saving so that, I think, people and individuals and businesses know best for their own situations how much they should be saving.

[00:07:10] And we should let, we should let folks be guided by the tradeoffs between. Spending their money now versus putting it away from the future. We just don’t want government policy putting their thumb on the scale in one direction or the other. The importance of savings, why we don’t want government to discourage savings is, I think, two, it falls in two big buckets.

[00:07:32] One is, uh, is, is, for people to have the resources they need in the future, to support themselves, to draw on in times of emergency, to save for retirement or education or starting a business. But also, saving is the foundation for economic growth. People’s every new piece of machinery or factory that’s opened, all the sort of spending on new research and development that gets us economic growth. All of that is funded by someone. Saving SA investment is essentially, is the other side of personal savings. And so then, to the extent that people are saving more, it means there’s more resources to, to invest for the future leading to. A bigger economy, higher wages, all the things that come with economic growth.

[00:08:20] Joe Selvaggi: That’s a big idea and we’re going to develop that more. In broad strokes, okay, so you set up my next question, which is, okay, we want the government neutral. We don’t want them to encourage savings, but certainly right now we don’t want them to discourage savings. How does then the government now substantially discourage us to save?

[00:08:37] Adam N. Michel: And so, I think there’s really two big ways they do it, and our conversation I think today is going to be mostly on the tax side, but I want to just mention that the spending that the government does also, depresses individual savings. many of the sort of social welfare programs, crowd out individuals, savings to the extent that, that the government is there to step in when, someone is, falls on hard times the, those programs ultimately send a signal to individuals that they don’t have to save their own money, for those unforeseen circumstances. There’s some, academic studies that, they basically show that the long decline in individual savings rates, over the last several decades, can be explained by increasing generosity of government benefits in Social Security and Medicare, the, and the rest of the many other government, social safety net programs.

[00:09:29] The tax code also is a major impediment to savers, the, which is the way the government funds all of that spending. We rely on, more or less an income tax system, which has a built in disincentive to save. It, double or triple taxes, people who decide to not spend their money today, but instead put it away for the future. So, your income is taxed first by the payroll and income tax. And then, if you save your money, and it grows over time, either you get paid interest, or the, you invest in a stock and it grows over time, the government then takes another bite at that apple through taxes like the capital gains tax, the dividends tax, and if you hold it to death, the estate tax.

[00:10:10] Joe Selvaggi: yeah, so you, you get hit twice, and I think it’s clear you made a very good case that if the government’s got a sort of safety net under you, you don’t need a safety net under yourself. So, and it’s, it encourages, I think we could call it a moral hazard where to use an economist’s term, if the government encourages us to spend every cent, because they’ve got the safety net, we spend every cent.

[00:10:28] But I think we’re going to focus on the tax disincentives. You mentioned, not just that we are taxed in our payroll, but there’s many layers of tax, and you even mentioned, I think, to some degree, we’re double taxed. I think a lot of our listeners may not appreciate the fact that every cent of our investment, when we take that, our income after tax and invest it in, in stocks, bonds, or whatever we happen to want to use to save for the future, that return is also taxed. So, 100 percent of our investment is post tax, and then the return on that investment is also taxed. So, we’re being taxed on the revenue of our post tax money. Is that an example of how we’re double taxed?

[00:11:04] Adam N. Michel: Yes, and if you’re investing in corporate equities, you’re taxed a third time by the corporate income tax, because if you’re, you invest in the stock market, and the government is taxing you on the return that you get, to, when you sell the stock.

[00:11:18] There’s already, the business has already been taxed, that’s built into, that’s lowering the return that you get as the individual. and so it, there’s a multiple layers of tax depending on where you’re investing and so the, I like to, when you earn a wage, you get to decide whether or not you’re going to spend it today or save some of it for the future.

[00:11:38] And the return that the market pays you, on, for investments or, the return on investment is, can be thought of as what the market is paying you to not spend your money today. And so, when the government is taxing that return, there, it’s, the government is lowering the market incentive to put money away for the future, actually encouraging you to spend more, when you earn it rather than putting it away for whatever future priorities you have.

[00:12:03] Joe Selvaggi: Right, and you’ve already established that, our economy runs on, people’s savings. I think perhaps people don’t appreciate the fact when they go to the bank for a mortgage, it’s someone else’s savings that they’re borrowing to buy their home. Same with a factory, you’re borrowing someone else’s savings to build your factory.

[00:12:18] So, this is a deep concept that I think isn’t intuitive for most people. They imagine banks just have money, but they’ve got other people’s savings. so we’re, so in so far as we can encourage that, we’re doing a lot. I think it’s important that you also mention the fact that, clearly, taxation on, let’s say, investment returns, imagine in the extreme, if we tax 100 percent of the returns on our investment, no one would invest. Therefore, 0 percent encourages us to invest. Is that fair? am I just stating the obvious that the more we tax, returns, the less likely we are to invest. Fair?

[00:12:49] Adam N. Michel: Yeah. I think that, that’s exactly right. When you raise the cost of something, you get less of it.

[00:12:53] Joe Selvaggi: Yeah. Yeah. Right. Okay. So, okay, let’s go. In what way does the tax code incurred savings? I know that we do have, everybody listening to this podcast probably has some sort of, tax favored, retirement account. We’re really focusing narrowly on one benefit, which is not running out of money in old age.

[00:13:08] so the government is aware that they want us to at least, again, I’m not going to go there again and say they don’t want to encourage us to save, but they want to, it discourages less to save. What are some of the ways the government currently encourages ordinary Americans to save for the future?

[00:13:23] Adam N. Michel: So, the tax code has lots of features that reduce this built in disincentive to save. The capital gains tax rate is lower than the income tax rate, instead of being at 37%. The top rate is at 20%. The corporate income tax rate isn’t as high as the income tax rate. It’s lower. It’s 21%. So, a lot of the, many of these features broadly reduce the disincentive to save.

[00:13:47] Not all the way, but they compensate somewhat for it there’s,the focus of, I think a lot of our, the testimony that I gave to Congress and our conversation today is. They also offer these, often they’re referred to as tax advantage savings accounts, which, as I already mentioned, is a little bit of a misnomer because they’re not tax advantage, they’re actually removing a disadvantage to save.

[00:14:10] So, we’ll call them qualified investment accounts. And most people are familiar with these in the form of your 401k. your sort of IRA, and then if you’re safe. So those are designed for retirement. And then if you’re saving for education, there’s also a 529 plan, which operates similarly. And these accounts essentially just remove capital gains and dividends taxes from those saved, the money you’re saving for those activities, whether it be education or retirement. And there’s sort of two different types of accounts, a Roth and a traditional, whether or not you’re taxed on the way in or the way out. There are more, they’re economically similar for most, for most people.

[00:14:48] Joe Selvaggi: Yeah, indeed. as you say, they’re still taxed. It’s just when they’re taxed. And as you say, a traditional IRA, it’s your pretax money is invested in it, but you ultimately are taxed when it’s taken out. And the Roth is post tax money, which is essentially taken out. without taxes. and if you’re, if

[00:15:01] Adam N. Michel: You’re in the same, if you’re in the same income tax bracket, throughout your life, which most people are not, they are economically equivalent, but if you’re changing income tax brackets over your lifetime, the sort of the advantage or disadvantage to the different systems, changes as to whether or not you want to be taxed on the way in or the taxed on the way out.

[00:15:19] Joe Selvaggi: Right and consult your financial advisor. We’re not going to give financial advice just today. We’re on a different topic. do these, incentives, these 401ks, they’re essentially a gentle nudge, as you say, they’re less incentive, disincentive to, to save. Do they work? Are people, using them? Do they, you’re the, PhD. Do people actually, use these vehicles more because they are so tax advantaged?

[00:15:40] Adam N. Michel: Yes, I think undoubtedly, they do. They’re in the case of retirement savings. They’re incredibly popular. most employers offer a 401k plan. there’s. Sort of IRAs are widely available, and many Americans take advantage of them.

[00:15:58] Similarly for 529 plans, there, there is a debate in the academic literature about how much 401ks are people shifting savings they would have otherwise done, from non-tax, non-qualified accounts to these qualified accounts, and so you, there’s a broad range of perspectives about the degree of new savings these accounts are creating, but I think my read of the literature is that, undoubtedly, most, a large portion of, if not most of the savings that’s in these qualified accounts do represent, new savings that is being encouraged, by reducing the disincentives that exist in the sort of normal tax system.

[00:16:39] Joe Selvaggi: All right. This is a great setup for really, I don’t want to bury the lead. This is the subject of our conversation, which I’m going to say, okay, if, these kinds of tax, favored accounts are good and encouraging, savings, why aren’t they enough? why, what, what’s going on? They, it sounds like they’re working. Everybody knows about them. Why aren’t they enough?

[00:16:58] Adam N. Michel: Yeah. So, they are working for the people that, that, are ready to and want to save for retirement or for higher education. But the, these, the existing system of accounts we have are for very specific activities, retirement, education, and many Americans, especially young Americans and lower income Americans, are maybe not ready to earmark their money or lock it up for multiple decades, all the way until retirement or.

[00:17:29] Earmark specific earnings they make this year for their children’s, college education many years down the road. That’s not to say that they don’t want to save or they’re not able to save. They’re just not ready to say, I am saving for X activity. Instead, they’re maybe they want to save for an emergency that’s five or ten years down the road, or something else, some other life priority, and so the retirement accounts and education accounts come with penalties. If you put the money in, the government penalizes you for taking it out, and so it discourages use of these accounts by people that are not ready to do these specific government favored activities.

[00:18:10] Joe Selvaggi: So, so what we’re doing is we limit, what we can put in, when we, how much we can put in, when we can take it out, who can contribute, all these kinds of things.

[00:18:18] So, in broad strokes, at a high level, what you’re taking issue with is that, or not taking issue, in your view, Fewer limits on those kinds of accounts would encourage their use. That is, if their people are less concerned about their retirement and more concerned about short term misfortune that they may need the money immediately, by taking away so many constraints, it would, all the goodness would spread to people who have different concerns or other concerns besides retirement and education. Is that fair?

[00:18:49] Adam N. Michel: Yes, that, that’s exactly right. It’s the complexity and the rules and the penalties that come along with the existing system that sort of, that scare many Americans away from accessing these accounts that you and I and many other Americans take for granted.

[00:19:04] And so my proposal is, what’s called a universal savings account. And so, it’s operates very much like these, like existing qualified accounts, but without all the strings attached. so, Americans could put in 5,000, 10,000, maximum 5, 000, 10, 000 a year into one of these accounts, that could be taken out whenever, whenever they need it for whatever purposes they need.

[00:19:28] so instead of the government saying you need to be saving for X activity, it just says, we’re encouraging you to save for whatever life’s priorities you may have. And if you need to access the money for an emergency, great. But also, this account is there for you to help invest and build for the long run, whether that be retirement or something else.

[00:19:50] Joe Selvaggi: So, if we imagine this is a very, it’s a universal saving account, which would be like a 401k for everyone, for everything, which is to say, we would take perhaps pretax money. we would invest it. And with the expectation that if we need it in an emergency, we could pull it out. We’d pay taxes at that point, but there’d be no penalty, right?

[00:20:05] We’d still be paying taxes. We’re not, this is not some sort of tax evasion scheme, rather it is a tax, a deferral scheme perhaps. And you’re going to put money in. It’s going to, by virtue of the fact that you can do pretax, it encourages you to do that now. Invest, let it grow. perhaps tax free. And then ultimately that emergency arises, it’s there for you, pull it out, you pay your tax that, whatever that happens to be, and you’re okay. You and I have talked on this show about the fact that, though we do pay a lot of tax collectively, that tax burden falls more to the highest earners. Would these kinds of tax incentives or, your universal savings account, would that be enough incentive for, let’s say, ordinary Americans who, are most likely to want to use and need this kind of thing?

[00:20:46] Adam N. Michel: Yes. And for a couple of different reasons. You’re right that the, that there’s a big sort of, standard deduction that removes a lot of people from the income tax rolls, and the capital gains tax rate actually doesn’t start kicking in immediately. There’s it’s bracketed as well, but not every, most Americans don’t spend their entire life in one income tax bracket.

[00:21:06] Yeah. you increase your earnings. Most people increase their earnings over time, and you change where you are in the income distribution throughout your life, and the, these tax, these accounts also protect people from taxes on, on interest, which is, which is taxed as individual income and not as capital gains or dividends.

[00:21:24] and so, they certainly would protect, Americans from these existing disincentives to save. And, and we’ve seen that, when these accounts have been used in other countries. They’re wildly popular in Canada and the UK. and we actually see them being used by. by people not, well, you see them being used by people across the income scale, but they’re most popular, and the sort of new adoption is largest, in the sort of lower income, middle income, brackets, because of the sort of simplicity, and ease of access, of the sort of, and the universal nature of these accounts.

[00:22:00] Joe Selvaggi: That’s good. I want to get to that later, how well it might be used elsewhere, if this is an original idea with you and us here in the U. S. But I want to focus on that idea that, of course, we do, sometimes we have periods of prosperity in our lives where we might be in a higher income and therefore, more incentivized to save.

[00:22:19] And of course, things aren’t going well, we’re more incentivized to use this money, but of course our income is lower, so we’re in a lower tax bracket. So, it may have perhaps a smoothing effect, but I’m also thinking though, of course, People being people, if they’re getting encouraged to add to these accounts, right? Oh boy, pretax money, it’s growing, stock market up 28 percent or something like this. Now they have an expense. They could either go to that savings account, but it’s doing so darn well. Might they actually go to the bank and borrow money? Is there unwisely start paying interest on a loan instead of using their own money from one of these accounts? Could it be too good?

[00:22:53] Adam N. Michel: So, I actually don’t have a strong view as to whether or not these accounts should be designed as pre-taxed accounts or post taxed accounts, whether they’re Roth or traditional. I think there’s pros and cons to both setups. I think in an ideal world you should be able to choose, but there’s different incentives depending on how it’s designed.

[00:23:15] The, I think your point about whether or not we want to encourage over savings. If there is such a thing is important. And this is why I, the. We started the conversation by saying we don’t want the government putting their thumb on the scale in one direction or the other.

[00:23:31] And so these accounts are really just removing penalties to savings. They shouldn’t be adding new incentives to save beyond whatever an individual is comfortable with. or willing to save, to save themselves. And that we actually do see that when the government does matching grants for additional savings, or automatically enrolls people in these accounts, and then encourages employers to put part of their paycheck in there without them opting in.

[00:23:57] They do save more than they otherwise should and end up taking on, some folks end up taking on, more debt in order to sort of, average out their take home pay, but I, we don’t see that when we’re just simply leveling the playing field, and not putting our thumb on the scale of encouraging more savings. We’re just getting out of the way and letting people save what is right for their own circumstances. Good enough.

[00:24:20] Joe Selvaggi: I keep pushing you towards encouraging savings rather than discouraging consumption. it’s, it’s two sides of the same coin. I’m going to throw a question that I don’t know.

[00:24:28] Maybe it’s a playful question, but I say it’s often said that our economy, two thirds of our economy is, consumer demand, or to use a different term, consumer consumption. If we succeed and we do encourage broad based consumer savings, we become a saving nation rather than a borrowing nation as individuals. Would we be discouraging consumption and therefore, perhaps, putting a wet blanket on a consumer driven economy?

[00:24:55] Adam N. Michel: No, and I think the, there is a tradeoff between how much money people are consuming today versus saving for the future, but that saving for the future is, as we’ve discussed, contributing to additional, innovation, research and development, things that actually bring prices down and allow people to purchase more, in, with their money in the future.

[00:25:15] And so the, it’s really savings and investment and business innovation, individual entrepreneurship that is the driver of long run economic growth. It’s a misnomer that. It’s all just about how much people are spending, today, that ultimately depends, uh, tells us how prosperous we are in the long run.

[00:25:34] that’s the model that leads us to think that that leads some economists to. To propose, the government just sending everyone a check, in order to stimulate demand and increase the size of the economy, which I think we just ran a version of that experiment, during the pandemic, and it ultimately created more inflation than it did, wealth building or long-term prosperity. And so this, this idea that there’s a tradeoff between. between consumption and growth, I think gets the sort of fundamentals of how the economy works in the long run, backwards.

[00:26:09] Joe Selvaggi: Indeed, it’s a common misunderstanding. I also say it also works in the fact that, I mean, a common argument for taxation, a progressive, as we’ve discussed in the past, ours is among the most progressive, taxation, programs, regimes in the world.

[00:26:22] I think the logic behind that is we tax more wealthy people because they presumably have more money to, to pay taxes, which no one can argue. And also, I think the logic and the moral case is, whereas, low-income people might be spending that after tax dollars on medicine or baby food, higher, tax people might be spending on luxury items, boats and yachts or whatever your brain conjures.

[00:26:43] I also think that the Progressive tax code also misunderstands the idea that whereas a higher income person has a higher propensity or lower propensity to spend on necessities, they have a higher propensity to spend on investments. That is, they’re going to put that money in the bank and as we’ve established, that money that goes in the bank makes us all more prosperous.

[00:27:03] That’s the money we use for mortgages or for business loans, etc. This is my long way of saying If we encourage everyone to save more, aren’t we essentially making us all into the other side of the coin? We’re all essentially financing growth for our economy and fellow Americans. We’re saving to benefit ourselves effectively, our collective self. Am I going too far on that?

[00:27:28] Adam N. Michel: No, that’s exactly right. the total pot of savings across America, which is includes the sort of savings from wealthy Americans and savings from, from sort of Americans all the way down the income scale ult is all financing the buildings and the machinery and the research that makes the economy run. That should be attracting foreign investment as well. It’s not just domestic investment that helps fuel economic growth. But, but certainly we want to be encouraging additional savings to help boost that sort of the investment which is the bedrock of economic growth.

[00:28:04] I think the, just quickly, the other point you That often we fixate on the wealth, the sort of wealthy billionaires or the wealthiest 1 percent of Americans, and that we might want to tax that wealth, or we might want to tax the returns to that wealth, but that wealth is, It is not just under a mattress somewhere, it’s actively invested in businesses all across America.

[00:28:28] Jeff Bezos wealth is in Amazon, which it employs, many Americans, gets, things to your doorstep, incredibly quickly. And so, taxing that wealth means you’re taxing, The entity that wealth is invested in, which means we get fewer innovative growing companies that sort of make America the prosperous place that it is.

[00:28:51] Joe Selvaggi: Yeah, and indeed, and even if it is in the mattress, it’s been taxed already. It’s post money. It’s after-tax money that’s in the mattress, uh, with those taxes, uh, keeping the lights on, uh, paying for the Army, Navy, Air Force, and the Marines. So, let’s not Well, too much on our view of tax principles. Let’s go back to a point you made, well, I just want to, I frankly don’t know the answer to this. Has this universal savings account idea been discussed in the past? I really am new to the idea, which is why perhaps I’m so excited about it. Has it been around for a while, or is this a new phenomenon that we’ve discovered recently?

[00:29:27] Adam N. Michel: So, it’s been around for a while. I think the most formal proposal in the U.S. that I’m aware of started and was in President Bush’s 2005 budget. He proposed something, I think he called it a lifetime savings account, which worked very similarly to a U. S. A. the USA in its current form, there’s been legislation that’s floated around Congress for a while, a really, a small universal savings account.

[00:29:53] I think it had a 202, 500, annual contribution limit, past the House of Representatives in 2018, but didn’t make it to the Senate or obviously to the President’s desk. So, it’s an idea that I think has been growing in popularity over time. especially as people have, sort of, come to terms with the complexity of the, of the rest of the sort of savings ecosystem, though, as we layer sort of new versions of retirement accounts on or make tweaks to 529 plans, each of these changes just begs the question, why not universal savings accounts?

[00:30:29] Joe Selvaggi: Right, so simplicity is the key here, which again, I want to go back to this idea that other countries have tried it or are doing it, what lessons have we learned? What has worked elsewhere? And what’s probably an example of where this wisdom has maybe not worked as well or backfired?

[00:30:46] Adam N. Michel: So these accounts exist in Canada, the UK, and South Africa, and in South Africa, the data isn’t as good, but in Canada and the UK, we, not as good, meaning we don’t have as good data to tell any story about them, but the Canada and the UK show that these accounts are widely popular, they’re used by people across the income distribution, that they’ve encouraged additional savings, and that they’ve supported They haven’t crowded out or reduced retirement savings, and so they’re complimentary.

[00:31:18] I see them as an on ramp to the existing sort of savings ecosystem. it gets people in the habit of putting a little bit money away each year and gets them accustomed to then it. also contributing to a retirement account or other qualified savings vehicles. in Canada in particular, it’s something like 40 percent of Canadian households, contributed to what they call them tax free savings accounts and about, and I think it’s almost 60 percent of Canadian households have one of these accounts. and more than half of account holders have income that’s about, that’s in US terms about 37,000 a year. So, they’re widely used, by, by people. no matter their sort of, their situation.

[00:32:02] Joe Selvaggi: So, so it works elsewhere. So, we’ve got some sort of, success story to point to. Let me ask you an awkward question, which is, okay, we know this well. We’ve established that it’s likely to help a lot of people that should be saving more. but of course, the government doesn’t have its own money. It only has ours. Our hardworking dollars. This seems to me like it would be delaying tax revenue collection. and that doesn’t seem like it would go over big in DC. Is this likely to reduce or affect or, influence revenue for the government?

[00:32:32] Adam N. Michel: Yes, so it certainly has a budgetary, impact, it would lower revenue coming into the government, by either delaying the tax revenue if it’s a traditional system or, in the case of a Roth treatment, it has a smaller budgetary effect early, but it would have a bigger budgetary effect in the future, depending on whether or not you’re paying taxes now or later and so, it certainly should be part of the broader budget conversation. The cost isn’t, isn’t huge and it can be dialed up or down depending on how big you make the accounts. But ultimately, it should be part of a broader tax reform package in my view, and there’s lots of sort of special carve outs, and deductions and credits in the tax code that could easily sort of offset the cost of this sort of system, while also boosting savings and sort of long run growth.

[00:33:23] Joe Selvaggi: Right, by reducing complexity, perhaps we all save, and, including the government and us and the time. I’m going to tie this then into current events. Okay, we start our show by talking about, tax cuts from 2017 that are, scheduled to expire at the end of 2025. We’ve got an election coming up.

[00:33:39] I don’t know if those tax cut expirations will be a key factor, but, this debate about universal savings account could also enter the debate, or in the conversation. Do you see, let me first ask, does this, the support for this, I watched your congressional testimony, and members, who fired questions at you came from both sides and they both seem very receptive to your ideas. So it didn’t seem to me an obvious partisan divide. So, I’ll say, is there one? And also, how do you see it fitting into upcoming elections? And of course, once the politicians get hold of this, all bets are off. But what do you see the future based on? It’s either partisan reception or its likely influence on the election.

[00:34:22] Adam N. Michel: so you’re right that I don’t there’s not necessarily a political valence to the idea of allowing more Americans to save more of their money. The 401ks are widely popular and supported across the political spectrum. So, our 529s, Congress just passed what they called Secure 2. 0, which was a retirement savings package that added additional flexibility to sort of ability to roll 529 education savings into personal IRAs for retirement.

[00:34:50] So it’s sort of, it’s a directionally similar to universal savings accounts, where it’s allowing you to, uh, more flexibility for the money that you’re saving instead of earmarking it for one thing. You can, you can, there’s a lot of options that you can choose in the future to change what it can, what you’re saving for. So universal savings accounts are just direct, it’s directionally similar to that. It’s expanding options to the extent that there’s a budgetary impact or there’s a perception that this is something that would be used primarily by higher income people. There, there could be some resistance to it among some sort of left leaning legislators.

[00:35:25] But the, but. I think the evidence is clear from Canada and the UK that this is indeed something that is most popular among people who are currently not eligible for the existing savings systems. And so, there’s, there’s certainly a good case to be made that this is a sort of a populist reform for your sort of everyday American.

[00:35:46] Joe Selvaggi: Well, populism polls well lately, so, but I’ll say it also appeals to those of us who sort of hew more to a classical, free market, view of the world of economics and the world. So, I’m sure we’ve piqued our listeners’ interest in this idea of a universal savings account, particularly if they’ve not heard of it before. Where can our listeners read more about your work, your research and your testimony on the merits of this idea?

[00:36:11] Adam N. Michel: Yeah, you can find my, my, I testified in front of the Senate Finance Committee, and so you can find it on their website or, at Cato.org, I also have a Substack that it’s called, Liberty Taxed, and, uh, and so you can, Adam, Michel, you search either one of those, on Substack, you’ll be able to find it, and I, I make sure that I send out my, My testimony as well as my, the outline of this universal savings account proposal, and, and so you can find it there as well.

[00:36:37] Joe Selvaggi: Well, good. I found it, captivating, and I think our listeners may well also find it very interesting and thought provoking as well. It really helps us understand the essence of the relationship between government taxes, our income, and how we manage ourselves and our future. So, thank you very much for joining me today on Hubwonk today, Adam. You’ve been great, and I really appreciate your information.

[00:36:57] Adam N. Michel: Joe, thanks for having me back on. It was great. I’m glad to get more, uh, get the idea of a universal savings account out there to, to more people.

[00:37:05] Joe Selvaggi: This has been another episode of Hubwonk. If you enjoyed today’s show, there are several ways to support Hubwonk and Pioneer Institute. It’d be easier for you and better for us if you subscribe to Hubwonk on your iTunes Podcatcher. It would make it far easier for others to find Hubwonk if you offer a five star rating or a favorable review. Of course, we’re grateful if you share Hubwonk with friends. If you have ideas or comments or suggestions for me about future episode topics, you’re welcome to email me at hubwonk@pioneerinstitute.org. Please join me next week for a new episode of Hubwonk.

Joe Selvaggi talks with CATO Institute’s Dr. Adam Michel about the opportunity for tax reforms that promote individual savings, an important foundation for economic growth, personal well-being, and intergenerational support.


Adam N. Michel is director of tax policy studies at the Cato Institute, where he focuses on analyzing the economic and budgetary effects of taxation in the United States. Prior to joining Cato, Michel served as deputy staff director at the U.S. Congress Joint Economic Committee, where he helped lead Senator Mike Lee’s (R-UT) Social Capital Project, organized congressional hearings, and produced research on a wide array of current economic topics. He has also worked as senior policy analyst at the Heritage Foundation and as the program manager for the Spending and Budget Initiative at the Mercatus Center at George Mason University. Michel is widely published and quoted in The Wall Street Journal, The New York Times, The Washington Post, and elsewhere. He has also appeared on Fox News, CNN, and CNBC to discuss tax policy and its economic effects. In addition to numerous book chapters, his scholarly work has been published in the Journal of Public Budgeting and Finance and Tax Notes. He received his PhD in economics from George Mason University in Fairfax, Virginia, and a BA in politics from Whitman College in Walla Walla, Washington.