Do Tax Breaks Encourage Saving?

America has a lot of quirks in our tax system. Commonly called loopholes, these are special provisions which allow taxes to be reduced because of certain choices made by taxpayers.

More properly, these are called tax expenditures. Some of these are on the table as we approach the “fiscal cliff” — the automatic tax increases set to take place in early 2013 by the debt ceiling compromise of 2011. The biggest tax expenditures are things like the deductibility for firms of health insurance premiums and pension contributions paid on behalf of their employees, and the mortgage interest deduction. Others were covered in this earlier post.

Now, there’s new research showing that at least some of these tax incentives don’t do much good:

… Every dollar …  spent on tax breaks increased total savings by about only one cent. In contrast, policies that automatically saved a portion of a worker’s income increased total savings by a substantial amount.

This suggests that tax incentives for people to save for retirement should be on the chopping block.