TIAA-CREF Raise The Rate Contest inspired Savings on Saving (SOS) System "The Saver-Friendly System"





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Published on Nov 10, 2010

TIAA-CREF Raise The Rate Contest inspired Savings on Saving (SOS) System "The Saver-Friendly System"

Social Security and Medicare taxes are deducted from employee's earned income and matched by the employers, for a combined total is 15.30%.

The Savings on Saving System "SOS" consists of a 15% consumption credit added to all payroll disbursements, and a 15% federal consumption tax. Individuals would get to keep the 15% credit on amounts not spent, as a reward for saving or investing. It further enhances any income tax benefits for participating in existing or new plans and universally applies to all saving.

Over 150 countries have consumption taxes that encourage savings rather than spending, by taxing consumption. Saving by low and moderate earners is as or more important in achieving our national goals, as saving by the wealthy.

All other things being equal, the SOS System will discourage consumption, encourage savings, raise the U.S. savings rate, very likely reduce the U.S. Trade Deficit, and collect approximately $57.8 billion of unreported employment taxes as a consumption tax.

Current U.S. employment or income taxes do not encourage saving (delayed-gratification) over spending (instant-gratification). Consumption taxes discourage spending and, by default, encourage saving. The replacing of a regressive tax, that doesn't encourage saving, with a consumption tax that does encourage saving, is innovative. A consumption tax offset by the consumption credit makes the SOS plan a neutral tax change from a regressive view point, is also innovative.

In replacing an existing tax with a new tax, rarely is the replacement tax as transparent as the former tax. Virtually all nation-wide consumption taxes are of a value-added tax (VAT) nature, i.e., levied at each stage of the supply chain and embedded in the price of the product, thereby, lacking transparency. The SOS 15% federal consumption tax is levied only at the point of sale, providing maximum transparency. In addition the SOS tax can't be marked-up by vendors throughout the supply chain, which is also innovative.

About 150 countries have nation-wide consumption taxes, ranging from 5 to 25 percent, which raise a lot of revenue (effective) and are easy to collect (efficient). The track record of these consumption taxes speaks to the feasibility of the "SOS" System. A federal statue could make it happen. Replacing our employment taxes is much less complicated than replacing our income tax system. A few adjustments would be necessary, e.g. where consumption is funded by monies that were previously FICA taxed.

The probability of an "SOS" statue over previous discussed value-added taxes VAT is increased since it doesn't make U.S. taxation more regressive and it is doesn't lack transparency (the two primarily objections to VATs). Consumption tax supports and critics exist among Republicans, Democrats, Liberals, conservatives and moderate; to quote Pat Choate, Ross Perot's 1996 running mate, "... But this is an historic economic crisis, and in such times impossible things can be accomplished."

According to study performed for the National Retail Federation, released October 14, 2010 on The Macroeconomic Effects of an Add-on Value Added Tax, spending would decline by almost $260 billion or 5.0 percent in the first year after enactment of a 10.3 % narrow-based VAT. Since the "SOS" is a higher (15% tax) and broad-based, spending could be expected to decline more, so combined with the second quarter, 2010 savings rate of 5.9%, the savings rate should reach 10% in 2012. The NRF study projects a loss of 850,000 jobs in year one and 700,000 jobs 10 years later, however most trade experts believe that a consumption tax will favor jobs, by significantly help level the playing field for U.S. exports.

The SOS plan incentivized savers/investors equally at 15%, a rate which should be more meaningful to 10%, 15% and 25% tax taxpayers than the wealthy. This increased relevance to lower and moderate earners should increase the breadth and depth of American savers.

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