AFTER SUMMONING Congress Tuesday night to adopt a "credible" and "responsible" plan to reduce the budget deficit, President Bush listed some of the things he thinks such a plan should contain. Far from prescribing pain, his list began with a series of what he called "growth-oriented tax measures," or tax cuts. Now comes word that complaisant Democrats may also be prepared to support some of these. One that both parties are unaccountably considering is as bad an idea as has surfaced in the budget summit.
The president proposes restoration of one version or another of the IRA, or individual retirement account, which was much reduced in scope and itself put out to a richly deserved retirement in the Tax Reform Act of 1986. Some influential Democrats also like the idea of restoring it, in part for its presumed political appeal to the upper middle class. But the serious IRA proposals are costly; instead of helping reduce a disastrous deficit, they would give away money the government doesn't have. The principal difference among the proposals is that some would take these losses up front while others would defer them, but all that aren't cosmetic would incur them.
The money would also accrue to the wrong taxpayers, disproportionately those in the upper income levels, since under the 1986 law, those at the lower levels can still make tax-free deposits in IRAs, provided only that they have the money to deposit. The proposals would therefore further reduce the progressivity of the federal tax structure, which has already lost too much of that mighty edge. Nor would they do the claimed economic good. The great rationale for reviving the IRA is that it would increase savings. In fact, many studies show it is much more likely to cause people simply to shift savings they were going to make anyway from accounts that are not tax-advantaged to these that are. Mainly, the IRA rewards behavior that was already going to occur. The government has better things to do with its scarce funds.
The budget negotiators are also considering such weighty steps as increasing excise taxes and Medicare premiums. These would likely have a heavy impact on people of low and moderate income. Does either party really want to impose such a burden in part to finance a frivolous further tax gift to those in the upper income brackets in the form of a reconstituted IRA? The Democrats are going to end up yielding to the president on some of the distributional issues in the budget. But this is one that gets them nothing; they should junk it.