Bush’s Saving Strategies

WASHINGTON —  Among the tax proposals that President Bush has included in his 2006 budget, two -- the retirement savings account and the lifetime savings account -- stand out.

Instead of costing the government money, as most Bush tax measures have done, the White House says these accounts would raise revenue over five years.

But the windfall wouldn’t last. After the first five years, the accounts would develop into major drains on the Treasury -- reducing future tax collections by an estimated $1 trillion over 75 years. Unlike traditional tax-sheltered retirement accounts, these accounts would require individuals to pay taxes upfront on money put into them. But when the accounts were cashed in, any profits would be tax-free.

The two proposed accounts will be on the table when the President’s Advisory Panel on Federal Tax Reform holds its first meeting today, said former Sen. Connie Mack (R-Fla.), who chairs the commission with former Sen. John B. Breaux (D-La.). Bush charged the commission with producing a package that would make the tax code simpler, fairer and more pro-growth -- with no net change in government tax revenue. Any package that includes the new accounts will have to offset their revenue loss.

Partly for this reason, Congress spurned Bush’s tax-advantaged savings accounts last year and the year before. But supporters and opponents alike say Bush’s emphasis this year on tax restructuring -- it is second only to Social Security on his domestic agenda -- gives the accounts a fighting chance.

Bush’s fiscal 2006 budget assumes a substantial revenue gain at the outset as taxpayers shift their savings from individual retirement accounts, which they are not taxed upfront, to the new accounts, which they would be. The Treasury would realize a $4-billion windfall in the first year, projections indicate, and $7 billion in the second.

But as account holders withdraw money tax-free, revenue losses could ultimately reach $10 billion to $20 billion a year, say Leonard E. Burman, William G. Gale and Peter R. Orszag of Washington’s Tax Policy Center, which provides independent analysis of tax issues.

Unlike today’s tax-sheltered savings accounts, which have varying income restrictions, the new accounts would be available to taxpayers of any income.

Couples could deposit up to $5,000 apiece annually into retirement savings accounts. They could withdraw the funds only after retiring.

The lifetime savings accounts would make an even sharper break with today’s practice. Families could contribute as much as $5,000 annually per member and withdraw the money any time for any purpose.

Pamela F. Olson, who as assistant Treasury secretary for tax policy from 2002 to 2004 originated the proposals, said the new accounts would simplify the tax code by replacing several savings vehicles for retirement, education and even healthcare.

Burman, Gale and Orszag disagreed, saying that “this proposal would ... create some new complexities by adding yet more choices to the panoply of tax-preferred savings vehicles.”

They also complained that the new accounts would mostly benefit the wealthy, who could afford to contribute the annual maximums.

Perhaps the most formidable foe of the lifetime savings accounts is the life insurance industry, which worries that they would compete with life insurance for investors’ savings. Jack Dolan, a spokesman for the American Council of Life Insurance, said his organization had retained Olson, the architect of the accounts, as a consultant.

Mack said Bush’s tax panel, which is to present its report to Treasury Secretary John W. Snow by July 31 -- relatively soon by the standards of presidential commissions -- would look not only at overhauling the current income tax system but also at replacing or supplementing it with a value-added tax or a retail sales tax.