Typically one has a percentage (based on a W-4) of their pay withheld to cover one's taxes at the end of the year, it occurs to me that this is effectively like storing that money in an account with the IRS at 0% interest. Hypothetically would it not be better to calculate your withholding amount and just deposit that into a savings account every paycheck and just use that to pay your taxes. It seems to me that as long as a person is disciplined enough to not touch that account, one could generate some residual income that way. Also as an added bonus if you are in a state that treats a tax return as in income you are now not raising your taxable income. I am thinking there must be a flaw to my logic but I cannot figure out what it is. Is my reasoning valid?
You've got an interesting theory, but you likely won't be able to actually implement it. Essentially, the IRS wants your tax money during the tax year and not just when you file the return. In fact, the IRS refers to income tax as a "pay as you go" tax. Even self-employed individuals (who have no employer with whom to file a W4) are usually required to submit regular payments (every quarter) during the tax year, or face penalty.
Essentially, your tax return is intended to balance the books, not to be the vehicle through which you determine and pay your entire tax liability.
There are some special cases where employees can be allowed to fill out a W4 in a way that results in no income taxes being withheld. See IRS publication 505 for details. Generally, these exemption requirements will not be met by most wage earning employees - exemption is intended to allow people who will have no tax liability to stop their employer from withholding.