Many people with low middle incomes already exceed the maximum income allowed to get the savings tax credit provided in this year's federal tax returns. Why not allow all tax payers who have interest income below a certain dollar amount (say $10,000 as a place to start "negotiations" in Congress) to have that income free of taxes. The wealthy who live on interest would still pay a significant portion of their current taxes, and those who rely on fixed incomes (senior citizens, for example) will benefit greatly. The number of people who save their money in bank accounts would also increase as they would see a tax benefit. I will play devil's advocate and argue that the more money available for lending may drive savings interest rates down, but the general idea of tax-free income from savings is still valid.
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This is a reasonable step towards increasing the savings rate. Savngs not only benefit the saver, they benefit society by providing investment capital. You are correct in noting that increased cash savings would tend to lower interest rates. But that benefits borrowers and stimulates buying. The only disadvantage is a loss of federal taxes. That would be partly offset by the increase in buying. Or the loss could be matched by an increase in taxes on, say, luxuries.