When President Bush makes his State of the Union address later this month, will he continue what has become his annual tradition by introducing a fourth tax cut proposal?
Conservative observers think it unlikely Bush will call for new rate cuts or succeed in making his tax cuts permanent this year, thanks to liberal Republicans and Democrats in the Senate. In a December 15 session with reporters, Bush himself sidestepped the question of whether he will propose new tax cuts in 2004.
But conservatives are pinning their hopes on a savings proposal that could dramatically reduce many workers long-term tax burdens, while possibly increasing government revenues in the short term, thus deflecting concerns about deficits.
The Treasury Department has taken the lead in pushing a total restructuring of the tax-privileged retirement savings system, which currently includes both before- and after-tax savings plans such as traditional and Roth IRAs, and 403(b) and 401(k) plans.
Treasurys proposal, dropped from last years tax cut during Senate debate, would replace all these plans with Lifetime Savings Accounts (LSAs) and Retirement Savings Accounts (RSAs).
Bill Ahern, spokesman for the non-partisan Tax Foundation, described the new after-tax savings plans as “Roths on steroids,” which are “bigger and more generous” than the tax-advantaged retirement accounts available under todays tax code.
As with todays Roth IRAs, contributions to LSAs would not be tax deductible. However, the investment income accumulated within the new accounts would be entirely tax-free, unlike traditional IRAs and 401(k) plans. The annual contribution limits would also be much greater, rising from $3,000 for most workers to as much as $7,500 per year, and the money would be more easily available for certain kinds of pre-retirement expenses, such as a childs education or a down-payment on a home.
The new system would also allow all Americans to participate, whereas the current system forbids participation by singles with annual incomes greater than $95,000 and married couples with incomes greater than $150,000.
In a speech to the Tax Foundation, Treasury Secretary John Snow pointed out another advantage of the proposal: Its simpler than the current system. “Retirement account regulations are among the most complex in our tax code,” he said.
Ahern argues that although this proposal will save Americans billions of tax dollars in the long run, the elimination of tax-deferred retirement accounts will actually boost short-term government revenues for at least ten years. That makes the proposal an ideal tax-cut at a time when there is a massive federal deficit.
Americans for Tax Reform President Grover Norquist said that the proposal could also boost Bushs plans for reforming Social Security. Once the new retirement accounts are established, said Norquist, the Social Security reform proposal would appeal to many workers by letting them put a portion of their Social Security taxes into the accounts instead of simply handing them over to the government.
“Social Security reform becomes a tool to excite people,” he told Human Events. “It gives them more money to put in their RSA.”
That would effectively amount to another tax cut, this time in the payroll tax.
Norquist also expressed hopes that Democrats and liberal Republicans in the Senate-who presented the greatest obstacle to Bushs tax cut plans last year-will go along with a plan to let businesses “expense” or completely write off capital investments immediately for tax purposes. Currently, businesses can only write off such investments gradually over several years in accord with complicated depreciation schedules-although the 2002 tax cuts accelerated the depreciation and allowed more immediate write-offs.