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Analysis

Bush Tries Again With Financial Proposals

By Jonathan Weisman
Washington Post Staff Writer
Friday, September 3, 2004; Page A27

President Bush last night promised major changes in American society's most basic pillars: its health care system, pension plans, tax code and workplaces.

Bush expanded on his push for more accountability in the nation's education system, proposing annual assessments and testing of high school students that go beyond those in his signature No Child Left Behind education law. Those tests would be sweetened with increased funding for the federal Pell grant program to help more high school students pay for college.

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Social Security

And he offered an idea that had been proposed by Democratic vice presidential nominee John Edwards: targeted tax breaks for geographical areas hit hard by difficult economic times.

But some of Bush's proposals, including revisions to the Social Security system and new types of "lifetime savings accounts," have been gathering dust for years. Some daunting barriers stand between the president and what he has dubbed his "ownership society," including a record budget deficit and rancorous partisanship in Washington.

"Many of our most fundamental systems -- the tax code, health coverage, pension plans, worker training -- were created for the world of yesterday, not tomorrow," Bush said in excerpts of his acceptance speech to the Republican National Convention that were released yesterday afternoon. "We will transform these systems so that all citizens are equipped, prepared -- and thus truly free -- to make your own choices and pursue your own dreams."

Revising the Social Security system to give younger Americans the option of investing part of their tax contribution would be the most dramatic piece of his second-term domestic agenda. "We must strengthen Social Security by allowing young workers to save some of their taxes in a personal account," Bush said in his prepared speech, "a nest egg you can call your own and government can never take away."

But Bush pledged to seek adoption of that proposal four years ago, and so far it has gone nowhere because of strong political resistance.

Bush's plan to create personal investment accounts to augment the existing system would require the diversion of some Social Security payroll taxes that otherwise would have gone to existing retirees and other beneficiaries. Given his promise not to cut those benefits, that diversion will have to be made up, probably through borrowing that would only add enormously to the government's $4.3 trillion public debt.

The most prominent recommendation of Bush's Social Security Commission in late 2001 would ultimately put the nation's largest entitlement program on a path to solvency, according to a recent analysis by the nonpartisan Congressional Budget Office. It would also make stock ownership almost universal, "which surely would be the ultimate expression of the American dream," argues Stephen Bainbridge, a law professor at the University of California at Los Angeles.

But solvency would not occur for decades. Meanwhile, the "transition costs" would be enormous. The Social Security Administration's actuary has calculated that the financing could add up to $2 trillion to the national debt over 10 years and would continue adding to that debt for 44 years, at a cost of $8.3 trillion.

"This whole Bush idea of individual accounts may be being sold as a way to move toward solvency, but in and of itself it only hurts Social Security solvency," said Kenneth S. Apfel, who served as Social Security commissioner in the Clinton administration.

The other controversial piece of the president's "ownership" agenda is a two-year-old proposal to create lifetime savings accounts, which would allow every American to save as much as $7,500 a year and shield investment returns from that savings from taxation. A family of four could save up to $30,000 a year, a figure out of reach for all but the richest Americans.

Since such accounts could be accessed at any time for any reason, the plan would virtually eliminate capital gains, dividends and interest taxation at a huge, long-term cost to the government. Conservative economists argue that such a cost would be mitigated -- if not eliminated -- by economic growth stimulated by the surge of savings and investment the accounts would prompt.

Indeed, those accounts may be the most significant part of Bush's other major pledge: to simplify the tax code. Bush promised last night to form a bipartisan commission to tackle "the current tax code, which is a complicated mess, filled with special interest loopholes, saddling our people with more than 6 billion hours of paperwork and headache each year."

But tax system changes could run headlong into a more pressing part of Bush's agenda: the permanent extension of the tax cuts enacted in 2001 and 2003.

Such an extension virtually precludes sweeping changes to the income tax structure, such as a single income tax rate or a national sales tax to replace the current income tax rate, said Daniel J. Mitchell, an economist with the conservative Heritage Foundation.

Bush's tax cuts maintain a graduated income tax system with six tax brackets, along with another tax rate for dividends and capital gains.

"The odds of complete, wholesale tax reform -- i.e., a flat tax -- are in the single digits," Mitchell said.

Still, Mitchell said Bush's words on tax reform were more than he expected. "This means at least that the good guy's on offense," he said. "Does that mean that two years from now we'll have tax reform? I have no idea. It nonetheless is good news."

In the absence of that, the virtual elimination of investment taxation through lifetime savings accounts would be a stealthy and large step toward the "fundamental tax reform" that conservatives have long clamored for.


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