VIEWPOINTS : THE TAX CUT DEBATE : Some law makers favor liberalizing IRAs. Others would trim capital gains levies. Which is better?
C ongress is considering two approaches to cutting taxes. One plan, pushed by the Bush Administration and passed late last month by the House, would cut taxes on capital gains for two years to encourage long-term investment. A counterproposal offered by Sen. Lloyd Bentsen (D-Tex.) would broaden tax benefits for people putting money into individual retirement accounts. Which approach would do the most good for the most people and for the overall economy? Times researcher Melanie Pickett interviewed experts on the topic. Excerpts of their comments follow:
Robert B. Reich, professor of political economy at Harvard University’s John F. Kennedy School of Government:
There’s absolutely no evidence that (the capital gains tax cut proposal) will stimulate productivity or net new investment, simply because it applies to investments already made. The primary beneficiaries unquestionably are people with incomes over $200,000.
Another important aspect of this new reality, should the Republican plan be enacted, is that lower- and middle-income taxpayers would be shouldering a much greater burden. Not only because they’d be paying more in order to make up for what high-income taxpayers are not paying, but also because their Social Security payments, even now, are being applied to budget deficit reduction. And the Social Security payments, of course, are very regressive. They apply to the first $43,000 from dollar No. 1 of earnings. Mike Milken last year fulfilled his Social Security obligations at 18 minutes past midnight on Jan. 1, to give you some example on how regressive this entire system is. If you put the Republican tax reduction on capital gains together with what’s happening in Social Security, you come up with a tax system that is the most regressive we have had in the last 75 years and the most regressive tax system of any industrialized nation.
As to the Democrats’ plan, it’s not that much better. IRA deductions are already available to families (with incomes) lower than $50,000, so all this does is extend IRA deductions to families with incomes greater than $50,000. And although in Los Angeles that may feel like middle class, that’s actually upper-middle class in the nation.
In terms of stimulating savings, the jury is out on the Democrats’ plan. The evidence we have as to whether IRAs actually stimulate new savings is ambiguous. And different studies tend to show different things.
The average middle-class taxpayer loses by the Republican plan and doesn’t gain anything by the Democrat plan. The upper-middle-income taxpayer gains a bit from the Democratic plan because IRAs can be deducted. He gains very little from the Republican plan. The 600,000 wealthiest individuals in the country stand to gain a great deal from the Republican plan because this enables them to shelter more of their income and to sell their assets at windfall rates.
David Keating, executive vice president of the National Taxpayers Union:
Either proposal can help the economy, again as long as they’re not paid for by raising marginal tax rates or by making some other harmful change. But it’s equally important that Congress control the spending so the deficit doesn’t balloon. It’s not commonly known, but the government is still getting a huge amount of new revenue each year from economic growth and some tax increases that have already been built into the system. So even with changes such as the capital gains tax rate reduction or even an extended IRA deduction, in the grand scheme of things, the government is still going to be getting a big increase in revenue from year to year. Even with these so-called tax cuts. But whatever changes are made by either plan, the changes in the economy will be fairly minor. Simply because the cuts themselves are fairly small when you compare them to the size of the economy.
If you just look at the tax due at the bottom of the 1040 form, it’s possible more people might claim an expanded IRA deduction than would benefit from a capital gains deduction. But I haven’t seen the numbers on that and I don’t know how they would compare. I wouldn’t be surprised if they were pretty close to each other.
Alice M. Rivlin, former head of the Congressional Budget Office and currently a senior fellow at the Brookings Institution:
I think both are pretty dubious propositions. The tax reform of 1986, which gave us a much more equitable income tax, was a good thing. And eroding it by making additional special provisions, whether for capital gains or for IRAs or whatever, is unfortunate.
The deficit is a long-run problem. We need to be worrying about how to bring the federal deficit down. It doesn’t make sense to take short-run revenue increases (as more investors sell assets to take advantage of lower capital gains taxes) at the expense of long-run losses.
Lawrence A. Krause, San Francisco financial planner and author:
The reality is that people are tax motivated. When they took away the tax incentives from IRAs, the sales went down substantially. The change in 1982, (expanding tax deductions for IRAs), showed that people who swore that they could never put money aside indeed could, given the right incentives. And it made investors out of people who previously were just savers.
Is that good for the economy? In the long run, of course. In the short run, maybe it was negative as far as taxes go, maybe it didn’t bring in the revenue. But you can’t tell me that by teaching people to save and invest, that’s bad in the long run.
The same thing holds true with regard to capital gains. By taking away capital gains incentives, you’re taking away motivation.
The little guy, if he’s motivated to save money in the first place, for example through the IRA, then maybe he can take advantage of capital gains, too, down the road. But he has to have the incentives to do that.
What boggles my imagination is that you’ll talk about something that will add to the deficit or bring in less revenue by--pick a number--$3-, $4- or $5-billion on one side of the coin, and on the other side of the coin you talk about a savings and loan debacle of $160 or $200 billion--and that’s waved over like a wand.
Mike Schuyler, an economist with the Institute for Research on the Economics of Taxation:
It’s desirable for the economy to lower the capital gains tax rate. It’s also desirable to return to the broader IRAs we had before the 1986 tax act. So in contrast to what some people are saying on Capitol Hill, I do not regard the IRA proposal as in any way a substitute for a lower capital gains rate nor do I think that expanded IRAs on their own merits are a bad idea.
What I really would like to see would be a reduction in the real capital gains tax rate and, to prevent inflation from covertly taking back some of the reduction, I would also like to see capital gains indexed for inflation. If I had my druthers, I think I would prefer that the capital gains tax be abolished. But short of that, a lower rate and inflation indexing so inflation does not produce fat gains which people have to pay real taxes on.
The Bentsen IRA proposal is not as good as the old law because the deductibility would be only 50% for people who are single and have incomes over $35,000 or (for joint filers who earn) over $50,000. They would have to fill out informational forms every year they paid this partially deductible/partially non-deductible IRA. Based on the information forms that presently have to be filled out for the non-deductible IRAs, which many people are saying are complicated, it would be a burdensome thing for taxpayers. Also, taxpayers have the problem that when they have a mixture of deductible and non-deductible contributions, they have to keep records until they begin to make withdrawals, which could be a generation from now.
Bentsen’s proposal to allow people greater ability to make withdrawals is desirable in the sense you want to encourage people to save for their own retirements--to exercise more responsibility. And actually I think people left to themselves tend to do that very well. One of the problems we’ve had is the tax system creates a strong bias for people to consume immediately and short-change the future.
