The Bush administration, seeking ways to boost the U.S. savings rate to cure a variety of economic ills, appears to be inching closer to recommending increased tax incentives for thrifty Americans.
U.S. Trade Representative Carla Hills added her support to the idea Tuesday, saying that expanding Individual Retirement Accounts would make her job of reducing America's huge trade deficits easier.Millions of American savers could benefit through expanded IRAs, which enjoyed great popularity earlier in the decade, but it could cost the U.S. Treasury billions of dollars in lost tax revenue.
Hills, in an interview with reporters, stressed that she was not signaling an imminent administration announcement on IRAs. However, other officials said a proposed increase in tax incentives for IRAs is high on the list of options being studied by the administration.
Americans' personal savings rate - savings as a percentage of after-tax income - fell to a 40-year low of 3.2 percent in 1987 and increased only slightly to 4.2 percent last year.
By contrast, Japan, the country with the world's largest trade surplus, had a savings rate of 16.5 percent in 1987.
Administration officials said they are planning a fall campaign, to be led by Treasury Secretary Nicholas Brady, focusing on the country's chronic low savings rate and proposing ways to correct the problem.
The huge cost of IRAs was one reason they were greatly scaled back by the 1986 Tax Reform Act. As a result, the number of tax returns claiming IRA deductions fell from 15.5 million in 1987 to 7.4 million last year.
In endorsing increased tax incentives for IRAs, Hills said it would "highlight the great need for private savings to go up. It sends up a flag saying, this is very important, not only to your nation, but to your own future and to your children."
A key reason advanced for America's high trade deficits is the fact that Americans consume more than the country can produce domestically. Economists argue that if Americans can be persuaded to cut back consumption and save more, it would limit the need for foreign goods.
A higher savings rate would expand the pool of available funds in this country and lower the cost of borrowing by U.S. businesses, making them more competitive internationally.
The Bush administration is negotiating with Japan on U.S. demands for the Japanese to lower trade barriers erected against foreign goods.
Hills said cutting the federal budget deficit, which drains away savings, and efforts to boost personal savings would counter Japanese arguments that America is not doing enough at home to fix its trading problems.
In recent weeks, Budget Director Richard Darman and Federal Reserve Chairman Alan Greenspan have issued their own warnings about the need to increase the U.S. savings rate.
Darman attacked America's "cultural now-now-ism," which he defined as an unrestrained appetite for satisfying immediate wants at the expense of long-term goals.
Greenspan, testifying before Congress earlier in the month, called raising the U.S. savings rate "the crucial issue for the long-term economic outlook of the country."