Politics & Policy

The Bush Revolution

On taxes.

The Washington Post says that President Bush’s new tax proposals are “audacious” and “radical,” and that Bush has “picked up the fallen standard of the Reagan Revolution.” One almost gets the sense that the Post thinks these are bad things.

Obviously, we disagree. When Bush suggested ending taxes on dividend income and bringing tax rates down this year, we called his plan the most pro-growth proposal since 1981. Since then, Bush’s tax policy has gotten even better. His Treasury Department is now proposing that people be allowed to save up to $15,000 a year without tax penalties. This would be a major step toward ending the tax code’s bias against saving and investment — a major step, that is, toward tax reform. It is also a major step toward Social Security reform, since it would expand the potential constituency for it.

Under the plan, individuals could put up to $7,500 a year in a retirement account and up to $7,500 in a “lifetime savings account.” They would not get a deduction for that saving, but they would not have to pay taxes when the money is withdrawn. The funds in the retirement account would be available when the saver turns 58. Withdrawals from the lifetime savings account, however, could be made at any time, for any purpose. Both these accounts would replace 401(k)s, IRAs, and the like. The Post considers these accounts to be “tax breaks.” But for most people, the effect would be to exempt all of their savings from double taxation. (In certain cases, saving wouldn’t be taxed even once. That really would be a tax break, and the plan should be modified so that all income is taxed once.)

The Post also worries that the lifetime savings account “could be raided at will, leaving [workers] without a cushion later.” It’s true. A family would have to decide whether to “raid” a savings account to pay for the children’s college tuition, or to leave it in there for retirement and health-care needs. This is called freedom.

Kent Conrad, the ranking Democrat on the Senate Budget Committee, worries that the savings accounts will swell the deficit in decades to come. “It’s breathtaking,” he says. “These guys [in the administration] really don’t care about the future at all.” Conrad seems to assume that federal revenues are the only important thing about the future. President Bush wants a future in which more Americans can meet their own needs with their own savings, rather than having to rely on the federal government.

The deficit-phobes at the Concord Coalition are also critics. “Deficits merely shift the tax burden toward the future,” according to the group. But there’s no one-for-one trade-off between tax cuts today and higher taxes tomorrow. Tax cuts can create wealth, and can lead the federal government to restrain its spending. Both effects would reduce the amount of taxes that would be necessary in the future to pay for today’s tax cuts. Deficits may raise interest rates somewhat, but Bush’s tax cuts would lower the cost of capital by more than enough to compensate for this problem.

Indeed, if we had a quibble with Bush’s plan, it would be that it shows too much concern for near-term deficits. We would prefer that contributions to the savings accounts be deductible, and the withdrawals taxed. That might induce more people to save. It would also mean that the taxes would fall on senior citizens rather than young people starting their families. The former group is better organized to defend its political interests, and thus to restrain taxation. But an up-front deduction would cause federal revenues to drop in this decade, rather than the future. We assume that’s why the administration decided to make withdrawals tax-free.

The most damaging economic criticism of President Bush’s tax plans has been that they do not provide immediate stimulus; they don’t “put money in people’s pockets” right away. That’s not true. As soon as Bush’s tax cuts are enacted, less money will be withheld from every paycheck. More important is that as soon as Bush’s tax cuts are enacted, people will have greater incentives to work, save, and invest. They can’t be enacted soon enough.


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