The Bush administration yesterday proposed a broad array of tax cuts that would drastically reduce government revenue for years to come.
The proposals -- many of which have been previewed by the administration in recent weeks -- include tax-free saving for anyone who can afford it, elimination of the tax on stock dividends and permanent repeal of the estate tax. All are likely to become more expensive with the passage of time and as taxpayers adapt to them. In the 10 years projected by the Treasury Department, the Bush plan would reduce federal revenue by $1.46 trillion -- almost two-thirds in the second five years.
Much of the seeming explosion of cost between 2008 and 2013, about $523 billion, is the result of extending the $1.35 trillion Bush tax cuts Congress enacted in 2001. Those cuts are scheduled to expire at the end of 2010, and since they are already in the law, they don't show up as a new cost in this budget. The provisions overall create numerous opportunities for Americans to pile up enormous sums tax-free.
The savings provisions, for example, would allow working people to set aside up to $7,500 a year in each of two new accounts, and as much as $12,000 via an employer plan meant to replace today's 401(k) and similar retirement savings plans. The amounts would be doubled for working couples.
These accounts could be funded with after-tax dollars, meaning there is no deduction for putting money into them. But there would be no taxes on withdrawals. A lifetime of compounding could drive these accounts into the millions of dollars, and for the wealthy, who might never need to tap them, the repeal of the estate tax would allow them to pass these sums along to later generations to draw out tax-free.
Roth IRA accounts already are being used that way by some well-to-do older people, but funding limits -- $3,000 or $3,500 a year currently -- and income limits reduce the number of people who can do this and the amount they can sock away. And large accounts would be subject to estate taxes.
But not only are the contribution limits on the Bush plans higher, there appears to be a way to accelerate contributions to the Lifetime accounts, at least this year.
The Bush proposal would allow Americans who already have certain kinds of tax-preferred accounts to convert them this year into the new Lifetime Savings Accounts or Retirement Savings Accounts. For some that would mean paying tax on the accumulated earnings in the account, increasing revenue, for the first few years.
Such conversions, along with the elimination of any tax deduction for traditional individual retirement accounts, allow the savings accounts to be counted as actually raising $14.8 billion for the first five years of their existence. In an indication of their true long-term impact, however, they begin costing revenue in 2008, and the amount climbs steadily through 2013, the end of the scoring "window."
But that's just the beginning. From there on, they seem likely to lose more and more revenue as the accounts grow larger and are not subject to any tax, income or estate, ever.
In addition, a certain kind of education savings arrangement called a Section 529 savings plan appears to offer a temporary way around the $7,500 annual limit. The moment the Lifetime accounts became effective, a family could go out and open a 529 plan in their children's or grandchildren's names, fund it to the tune of $100,000 per kid (limits are actually higher, but more would trigger gift tax), and then immediately turn around and convert it to a Lifetime account. Since the 529 account would have existed only briefly, there would be little in the way of earnings to pay tax on.
Thus each child of a wealthy family could begin 2004 with $100,000 that could grow tax-free for a lifetime. The full impact of such situations on revenue would not be felt for many years, but they are potentially very large.
A legislative or regulatory fix might head this off, but right now, a Treasury official conceded, "there's an issue with 529 plans."