Sunday, September 26, 2004

Illiquid Wealth

One thing I've been thinking about over the last few weeks is how much the tax system in this country encourages people to hold their wealth in extremely illiquid assets. When I say "thinking about" I mean that, and not, actually, reading or doing any research about. But, I thought I'd just float the issue and maybe I'd be encouraged to dig a little further.

What I mean is that the tax system encourages people to hold their money in real estate through the home mortage interest deduction (and other various programs which encourage people to buy). It also encourages people to save in various investment accounts which can't be tapped without serious penalty until retirement (or, for a couple of other purposes). So, people scrape together as many quarters as they can to throw tax free into their 401K or IRA or whatever. And, there's a relative disincentive for putting money into a standard savings account or some other liquid asset. The net effect of all of this is, among other things, that even people with relatively decent incomes and who are actually managing to accumulate some wealth, still feel they are living "paycheck to paycheck" (once they've sent their mortage payment and thrown a few bucks into their retirement account) because most of that wealth can't be converted into cash as needed.