Tax Gimmickry

Monday, April 17, 2006

MUCH TO THE chagrin of the White House and the GOP leadership, lawmakers didn't get a new round of tax cuts done in time for tax day today. But when Congress comes back from its recess, it's expected to take up a deal to extend President Bush's capital gains and dividend tax cuts. To make their budget-busting tax policy appear less costly than it is, the lawmakers are resorting to a gimmick that is even more egregious than their usual tactics.

This one would, as usual, hide the cost of tax cuts that primarily benefit upper-income Americans. But it would accomplish that budgetary smoke and mirrors with a new tax provision, involving retirement savings accounts, that also benefits the well-to-do. And, to top things off, this new tax provision, while masking the cost of the tax cuts by bringing in more revenue in the short term, would in the long run worsen the fiscal situation by piling on more debt. No one who's serious about controlling the deficit -- whatever one's position on extending the tax cuts -- could support this dishonest approach.

The gimmick is intended to get around a Senate rule that requires 60 votes to approve a tax bill if it's going to deepen the deficit more than five years down the road; if it won't have that long-term impact, a simple majority could suffice for passage. Unfortunately for Senate leaders, a two-year extension of the capital gains and dividend tax cuts, now set to expire in 2008, would cost $20 billion over the next five years -- but $30 billion more in the five years after that. Taxpayers will scramble to take advantage of the lower rates now, thereby lessening tax revenue later. So to pass the cuts with only 51 votes, legislators have to find some way to offset that second five-year revenue loss.

Enter the retirement savings gimmick. As it's being discussed behind the scenes, this would let wealthier Americans use savings plans known as Roth IRAs. With traditional IRAs, taxpayers get to deduct the contributions they make from their income for that year; they pay taxes on the savings once they are withdrawn. Roth IRAs flip that arrangement around: Contributors pay taxes on the income they put into the accounts, but their savings then grow tax-free. So letting more people put money into Roth IRAs would increase tax revenue for a while -- offsetting, at least in theory, the cost of the capital gains cuts. But the Roth change would cost money down the road, as revenue once subject to taxation would grow tax-free.

Bottom line: A Senate rule designed to make it harder to increase the deficit would be circumvented with a maneuver that would end up increasing the deficit. And a tax cut for wealthier Americans that would cost $50 billion over 10 years would be "paid for" in part by another tax cut for the well-off, which would end up costing billions more. That's amazing -- even from this Congress.

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