On March 14, at the Workshop " individual Income Tax Law - Ensuring fairness, promoting growth" organized by Lao Dong Newspaper in coordination with the National Economics University, Dr. Chau Dinh Linh - Lecturer at Ho Chi Minh City Banking University shared:
In recent years, the idea of taxing savings interest in Vietnam has attracted the attention of not only policymakers and financial experts, but also public opinion. The set goals include increasing state budget revenue and improving fairness in tax burden allocation.
However, many opinions are concerned that this policy could reduce people's motivation to save, negatively affecting the mobilized capital for the banking system, especially in the context of Vietnam's economy still recovering from difficulties caused by the COVID-19 pandemic (OECD, 2023).
In addition, taxing deposit interest is considered a step forward in efforts to adjust tax policies in line with international practices (HMRC, 2023; Tax, 2022). However, it is important to carefully consider the time, implementation method and tax exemption mechanism for groups of subjects at risk of financial vulnerability.
The author's point of view also emphasizes that this policy should not be rushed to implement during the period when people have unstable incomes, and at the same time, it is necessary to establish measures to minimize the impact on the group of small-scale savers, retirees or those who depend heavily on interest to make ends meet.
This article aims to analyze more deeply the the theoretical foundation of the proposal to tax savings interest, assess the potential impact on savings behavior, banking activities and macroeconomic stability, and draw international lessons. On that basis, the article proposes feasible solutions to help balance the budget collection goal, tax fairness and the need to maintain savings momentum in Vietnam in the future.
Savings theory and the role of interest rates
In macroeconomics, savings are considered a key factor in creating capital for investment, contributing to long-term economic growth (Barro & Sala-i-Martin, 2004). According to Savings-Investment theory, real interest rates are an important driving force to encourage savings (Keynes, 1936). Post-tax interest rate directly affects the decision on current and future income allocation of individuals (Atkinson & Stiglitz, 1976).
There are two effects to consider:
Alternative effect: When net interest rates decrease due to tax, savings become less attractive than spot consumption.
Income effect: People can increase savings to compensate for future tax losses, maintain the expected standard of living when retiring or deal with unexpected risks. The net impact of these two effects depends on the expansion of savings supply, average income, and financial culture in each country.
For Vietnam, where income is still in the process of improving, the engine for risk-off savings and accumulation for the future is still very strong (Son, 2024). Any changes in tax policy need to be cautious to avoid causing negative fluctuations in the stability of the financial market and savings psychology.
Calculating fairness in taxing deposit interest
Providence from savings deposits is a form of passive income). According to vertical fairness and zero fairness theories, the taxation of deposit interest can be explained to ensure that each individual pays taxes in accordance with economic capacity (Auerbach & Hines, 2002). In particular, a high-income individual with a large deposit can be subject to a higher tax rate than a person with a low savings rate.
However, the core problem lies in the way the tax rate is designed:
First, if the tax rate is applied simultaneously, people with small savings, usually low-income or retired people, will also be taxed like people with large assets, violating the principle of vertical fairness
Second, if there is a tax exemption threshold, the population group that is financially vulnerable will not be affected, while the larger savings group will have to pay taxes, creating a fairness of " giving a lot, receiving a lot, paying less, receiving less" (Creedy, 1996).
Tax theory and interaction with macro policies
In terms of policy, deposit interest rates also need to be assessed through the lens of the public economy (Mus Grave, 1959). Taxes should be designed to: Ensure stable revenue sources for the budget; Limit resource allocation distortation, including motivation for saving and consumption; Promote social justice and macro stability.
This policy cannot be separated from the monetary policy of the State Bank. When deposit interest rates are taxed, banks are forced to consider increasing nominative interest rates to maintain competitiveness, leading to the risk of increasing lending costs and affecting investment (Fukuyama & Matousek, 2017).
If there is no harmonious balance, combining the deposit interest rate policy with monetary policy can cause financial market instability, in contrast to the goal of controlling inflation and stimulating growth (Mishkin, 2007).
Analysis of impacts and challenges in the context of Vietnam
Impact on low-income people and retirees
Taxing savings interest can reduce net income of depositors, especially affecting low-income people and retirees, who often depend on this interest to make ends meet. According to data, total savings deposits in Vietnam will reach about VND 8,500 trillion (USD 365 billion) by the end of 2022, with an average interest rate of 5.5%/year.
If they are taxed, they will lose an additional amount of money each year, which could be a significant figure for those who rely on interest, especially those who retire without pensions. According to the International Labor Organization (ILO), only about 20% of Vietnamese workers are covered by social insurance, meaning many elderly people depend on personal savings, and this tax can reduce their financial capacity.
Risks of shifting investment channels
If deposit interest is taxed, people can switch to other investment channels such as gold, foreign currency, real estate or stocks to seek higher profits, reducing the scale of deposits in banks. The Vietnam Stock Market (VN Index) has had an average return of 10-15% in recent years, but the risk is higher.
Real estate in Hanoi and Ho Chi Minh City has an increase of 10-15%/year, attractive but with little liquidity. Gold and the US dollar are considered safe havens, especially when the economy is unstable. Research from OECD (2023) shows that in countries that apply savings interest rates, people often shift capital to non-taxable channels, affecting bank capital. This could reduce the bank's lending capacity, affecting economic growth, especially in the recovery period.
Impact on social security
Taxing deposit interest can put great financial pressure on disadvantaged groups, such as the elderly without pensions or low-income people, reducing social security.
According to a survey by the General Statistics Office of Vietnam, about 40% of households with savings under 50 million VND, mainly low-income groups, are vulnerable to real tax erosion. The elderly, with a rapidly increasing rate (expected from 7.2% in 2020 to 16.8% in 2050, according to the ILO), may face financial difficulties, increasing the risk of poverty.
To reduce the impact, there needs to be a tax exemption threshold, such as the UK with a tax exemption of 1,000 pounds/year (an annual interest received from savings deposits), equivalent to 27.6 million VND, to protect low-income people. Vietnam can learn and apply the tax exemption threshold of 5 - 10 million VND/year, protecting people with small savings.
Impact on the operations of commercial banks
The Vietnamese banking system depends heavily on residential deposits to provide loans and promote production and business (Son, 2024). Under normal conditions, competitive interest rates maintain stable deposit flows. However, when deposit interest is taxed, two scenarios may occur:
First, banks increase deposit interest rates to attract depositors, compensate for tax losses. This leads to increased capital mobilization costs, leading to higher lending interest rates, negatively affecting credit growth and capital costs for businesses.
Second, people seek alternative investment channels, reduce deposit volumes, force banks to consider restructuring their portfolios or increasing foreign capital attraction, which poses a potential risk of foreign currency imbalances (Fukuyama & Matousek, 2017).
Time of implementation and correlation with economic recovery
The author emphasized the sensitivity of the implementation time. After the pandemic, many households and businesses are still in the process of recovery, with unstable income. Any tax shock can have a strong impact on total demand and savings behavior.
According to the International Monetary Fund (IMF, 2022), tax reform should be implemented in a period when the economy has entered a solid growth path, in order to minimize the risk of further aggravating macro instability.
International lessons and suggestions for Vietnam
International experience
English: Apply Personal Savings Allowance (PSA), exempt deposit interest from tax up to 1,000 pounds/year, protect small depositors (HMRC, 2023). This approach is highly appreciated for its simplicity, clarity and ensuring fairness according to income.
Japan: fixed deposit interest rate ~20.42%, but people can declare tax refunds depending on total income, helping to reduce the burden on low-income groups (JICA, 2022).
Singapore: Interest on deposits subject to personal income tax, but some types of special accounts (CPF) are exempt from tax to encourage retirement savings (Monetary Authority of Singapore, 2021).
US: Taxation is based on a progressive rate of 537%, there is no separate exemption threshold for deposit interest, but the general income tax system has standard deductions (IRS, 2022).
International studies (OECD, 2023) show that a successful deposit interest rate policy needs to be accompanied by a tax exemption threshold, a tax rate differentiation according to the savings scale, or a progressive deduction based on total income. This both protects those with small savings and ensures that the rich contribute more fairly. However, the above countries all have a stable financial system, consistent - fair tax policies, and above all, economic development policies to pursue investment and consumption.
Proposing feasible solutions for Vietnam
Based on the above analysis, Vietnam can refer to the following solutions if it wants to implement this policy. However, at present, policymakers should consider carefully to avoid unnecessary disruption in the stability of the financial system. Solutions that may be implemented in the future include:
Develop a tax exemption threshold or a low tax rate for small interest rates: Apply a tax exemption threshold for savings accounts with a balance corresponding to an annual interest rate below a certain threshold (for example, 10 million VND/year), similar to the UK's PSA; For interest rates exceeding the threshold, apply a progressive tax table, ensuring that people with higher savings will be subject to higher tax, in line with the principle of vertical fairness.
Clear and transparent implementation roadmap: pilot on a small scale or limited to account groups with large deposits, then expanded when the economy is stable (IMF, 2022); Publicly announce the roadmap at least 1-2 years before the policy takes effect, helping people and credit institutions to adjust appropriately, reducing market shock.
Combining harmoniously with monetary policy and banking supervision: The State Bank needs to carefully assess the impact of deposit interest rates on interest rates and capital flows, avoiding the situation where banks massively raise deposit interest rates, increase lending costs (Mishkin, 2007); Establish a close coordination mechanism between the Ministry of Finance and the State Bank, ensuring that tax policies do not hinder the goal of price stabilization and support economic recovery.
Improve the tax collection system and information transparency: make deductions at source for deposit interest, and at the same time allow people to self-declare in their annual tax records if they want tax refunds or adjustments (JICA, 2022); Strengthen financial technology (Fintech) and data connectivity to avoid fraud, ensure transparency, and simplify the tax payment process ( Johnson & Smith, 2021).
Communication and awareness raising: Strengthen communication about the goals and benefits of policies, explain tax exemption mechanisms or progressive tax rates, thereby reducing misunderstandings about "taxing all savings", Consulting people about different investment channels, helping them make reasonable financial decisions, reducing confusion and withdrawing money massively from banks.
Concluding, taxing savings interest can bring benefits to budget revenue and increase tax fairness, but on the other hand, it also poses significant challenges for depositors, the banking system and macro stability (OECD, 2023). In the context of Vietnam, applying this policy hastily when people's income is not stable can easily cause negative reactions and weaken deposit flows at banks. The above analysis shows that building a tax exemption threshold, a clear implementation roadmap, synchronous coordination with monetary policy, and ensuring transparency in tax management are vital factors for the success of the policy.
From international lessons, an effective deposit interest tax policy often protects low-income people, while encouraging large depositors to contribute more to the budget. This is also the approach proposed by the author to ensure the dual goal: increasing budget revenue and maintaining a savings driver for the entire Vietnamese economy.
In the coming period, it is very important to continue to conduct experiential research, assess multi-dimensional impacts and closely coordinate with relevant agencies to propose a roadmap for implementing savings interest rates in a reasonable and sustainable manner. In particular, planners should implement it in the economic growth cycle and be consistent with both fiscal and monetary policies.
