|[speaking of redistributing wealth..........]
[New York Times]
February 6, 2003
Bush's Plan Would Scrap Many Investor Taxes
By EDMUND L. ANDREWS
WASHINGTON, Feb. 5 - Piece by piece, President Bush's new tax proposals would
go a long way toward achieving a goal cherished by many of his top advisers:
eliminating taxes on investment income.
White House officials insist that their proposals are not part of a
comprehensive plan to push through a fundamental overhaul of the tax system.
The goal, they say, is simply to encourage savings and eliminate obstacles to
The intent of the proposed tax-free savings accounts, Pamela F. Olson, the
assistant secretary of the Treasury in charge of tax policy, said when the
plans were presented last week is to "make saving simple for everyone and for
But experts say the myriad changes would do much more by shielding the vast
bulk of most individuals' investment income. "It's a comprehensive tax
shelter," said Alan J. Auerbach, a tax expert at the University of California
at Berkeley. "It's huge, but the costs don't show up in the budget as being
President Bush personally unveiled the White House proposal to eliminate taxes
on most corporate dividends, a move that would cost the Treasury $300 billion
over 10 years. That would be the first big step in making investment income
But more important, in the view of many experts, is Mr. Bush's even newer but
much less trumpeted proposal to revamp and expand the nation's laws on
tax-advantaged individual retirement accounts.
Under that proposal, a married couple with two children would be able to put
up to $45,000 a year into a class of individual retirement and savings
accounts. They would still have to pay taxes when they earned the income, but
they would never have to pay taxes on any of the money that accumulated in
their accounts after that.
The new retirement plans would shield much more than income from stock
dividends. They would also shelter interest from bank certificates of deposit
and corporate bonds, and they would eliminate taxes on profits from all kinds
of investments held in the new accounts.
"This proposal is simply a Trojan horse to get us to the point where we don't
tax investment income," said Representative Earl Pomeroy, Democrat of North
Dakota, who has studied retirement issues for years.
At least as envisioned thus far, people would even be able to take home-equity
loans on their houses, deduct their payments of mortgage interest and put the
money in a "retirement savings account" or a "lifetime savings account," where
it could earn tax-free profits indefinitely.
The costs to the Treasury would be minimal for the next few years, but they
could be huge over the long run as investment income built up and remained
Administration officials have not provided any long-term price tag for the new
retirement proposals. Because people will be encouraged to move money from the
current individual retirement accounts to the newer plans, the Bush
administration estimates that the measure will actually generate an additional
$15 billion in tax revenue over the next five years. But after 15 or 20 years,
experts say, the new plans would reduce tax revenues by many times that much
money every year.
The political prospects for the administration's plans remain far from clear.
Congressional Democrats are adamantly opposed to the dividend tax proposal,
and many Republicans are uncomfortable with it as well.
The retirement plan, announced late last week, is so new that Republicans are
just beginning to digest the ideas. Representative Bill Thomas, Republican of
California and chairman of the House Ways and Means Committee, said on Tuesday
that he would take up the retirement proposals only after dealing with Mr.
Bush's original economic package, which includes the dividend tax cut.
The retirement plan has already received support from lobbyists for the
securities industry, which sees rich new opportunities for marketing new
individual retirement plans and selling the securities to go in them.
But insurance companies are expected to fight the idea because the new plans
would undermine the tax advantages that many life insurance policies offer in
sheltering the investment income that builds up from premium payments.
States and city governments may fight both the dividend and the retirement
proposals because both measures would diminish the tax advantage that
municipal bonds have long enjoyed over corporate bonds and stocks.
On the other hand, the popular appeal of Mr. Bush's proposals could trump much
of the resistance. Though only a tiny percentage of taxpayers receive more
than a few hundred dollars a year in taxable stock dividends, millions of
people could be attracted to the saving and retirement plans.
Each individual would be allowed to contribute up to $7,500 a year from
earnings, and each couple could contribute $15,000, into a retirement savings
The "lifetime savings accounts" would be even more alluring. Each individual
in a family could contribute up to $7,500 a year from any source. So a family
of four could put aside $30,000, and the family would be free to withdraw
money for any purpose at any time.
The lifetime accounts could even be used as checking accounts, used to pay
daily expenses but also accumulating tax-free interest.
If approved by Congress, all of this would go a long way toward reaching a
broad goal of senior White House advisers, which is to move from today's
complex tax system to a much simpler system based on either a flat-rate income
tax or a consumption tax, a form of sales tax.
Investment income would inherently be excluded from taxation under a system
dominated by a consumption tax. A flat-tax system would not necessarily
exclude investment income from taxation, though most of the proposals offered
in the past have proposed just that. In any event, a flat-tax system that
eliminated most deductions would apply a much lower tax rate than the one
imposed at present.
The big difference between Mr. Bush's current proposals and most of the
academic plans for a radical tax overhaul is that the bigger plans would
eliminate tax breaks like the mortgage interest deduction. Mr. Bush's
proposals end the taxation on much, if not most, investment income, but they
do not offset that with any new tax on currently protected items like home
borrowing, charitable contributions and state taxes.
R. Glenn Hubbard, chairman of the White House Council of Economic Advisers, is
a fan of fundamental tax overhaul and has written extensively about how a
consumption tax could work. But he said the new proposals were not yet part of
a broader plan.
"The president is a pretty straight shooter," Mr. Hubbard remarked last month.
"If he wanted fundamental tax reform right now, he would have said so."