A Middle Class Tax Cut Called The Ira?

The politically appealing idea of expanding tax-deductible individual retirement accounts has been advanced often by its chief advocate, Lloyd M. Bentsen. Now, Congress and the Clinton Administration are starting to appreciate the Treasury Secretary's persistence. As the President's January budget message and State of the Union speech enter the drafting phase, aides are saving space for a proposal that could be marketed as a fulfillment of Clinton's 1992 campaign pledge to provide the middle class with a tax cut.

Support for the idea is growing, thanks to a rare alignment of political and economic forces--and the influence of Bentsen, the Administration's elder statesman. As Senate Finance Committee chairman, he pushed through an IRA expansion bill in 1992 that carried his name, only to see it vetoed by President Bush. Last year, as Treasury chief, Bentsen was poised to champion his proposal again. But he reluctantly backed off after agreeing that tax hikes and spending cuts to trim the federal deficit were more important than IRAs raising the nation's savings rate.

LOYAL OPPOSITION. But as Bentsen revives his pet plan for 1995, he realizes that even a modest program could meet fervent opposition within the White House. Chief of Staff Leon E. Panetta opposed expanded IRAs when he was chairman of the House Budget Committee. Office of Management & Budget Chief Alice M. Rivlin would sooner cut the deficit than provide new tax breaks. And even Treasury Under Secretary Lawrence H. Summers worries that his boss's idea may be too expensive.

The IRA, however, is too popular to ignore. Passed in 1974 and expanded to virtually all workers in 1981, it proved a boon to the mutual-fund industry until Congress raided it for money to pass tax reform in 1986. Now, restoring it to its pre-1986 level--without income limits--and adjusting for inflation could cost as much as $8 billion a year, according to some estimates.

Besides such budgetary obstacles, Bentsen must overcome arguments from some economists that IRAs are used by taxpayers merely to shuffle portfolios to tax-sheltered accounts, without producing any net savings. "If you had the banks and the mutual funds doing the selling, putting the advertisements in the newspapers, that would encourage savings," Bentsen says. Even skeptics agree that the massive ad campaigns waged by banks in the 1980s to encourage savers to open IRAs had their effect. And IRA proponents insist the savings program never got a fair test, since an increase in private savings can be expected only after some time has passed following the shift of current savings into IRAs.

Since the 1981-86 experiment, economists increasingly think it possible to craft a new IRA law that would boost private savings more quickly. "The evidence so far on whether IRAs have encouraged savings is ambiguous," concedes Council of Economic Advisers Chair Laura D'Andrea Tyson. "But that doesn't mean you can't design a system that could be targeted to produce a discernible effect on the savings rate."

OUTSIDE IDEAS. Tyson has her staff studying the effects of placing various floors and ceilings on IRA tax deductions. For example, if statistics show that taxpayers in the $150,000 income range ordinarily save $3,000 a year, then an IRA deduction for their tax bracket could be limited to new savings in excess of $3,000. Similarly, allowing use of the IRA for college expenses, first-time home purchases, or medical expenses (with certain limits) might also encourage participation.

Think tanks and lobbyists from the mutual-fund, banking, and securities industries are pushing their own ideas on the Administration. One from the Progressive Policy Institute would provide a space on the 1040 Form to direct a federal income-tax refund directly to an IRA. Realtors, homebuilders, and universities support an expanded IRA that could be used for downpayments on a home and educational expenses, as a current Senate bill provides.

Among the strongest proponents of an expanded IRA are the President's outside political advisers, who fear that voters will punish Clinton in 1996 unless he makes good on his campaign promise of a middle-class tax cut. One attractive "pro-family" possibility includes allowing nonworking spouses to contribute as much as $2,000 to an IRA and take the tax deduction jointly.

The Administration is also considering a proposal to increase the income cap, which starts to phase in at the $40,000 income level and prohibits an IRA deduction by taxpayers who have a joint income of $50,000 or more and are covered by a pension plan.

This makes sense, since the current cap and contribution limit of $2,250 aren't indexed for inflation and haven't been raised since 1982. In fact, the Employee Benefit Research Institute estimates that only 38% of joint filers will be eligible for the deduction by 1995, down from 45% in 1991. The most radical proposal would allow workers covered by a pension plan to deduct IRA contributions no matter what their


DISMAL SAVINGS. On Capitol Hill, the idea of expanding IRAs is also popular. A "Super IRA" bill sponsored by Senate Finance Committee members John B. Breaux (D-La.) and William V. Roth Jr. (R-Del.) quickly won 56 other co-sponsors. And some 300 Republicans running for Congress pledged on Sept. 27 to enact a 10-part economic program that contains an expanded individual retirement account.

Another source of Hill support: After the November election, the Bipartisan Commission on Entitlement & Tax Reform, headed by Senators Bob Kerrey (D-Neb.) and John C. Danforth (R-Mo.), will report that net national savings has fallen from 8% of the economy in the 1960s to a dismal 2% today.

The biggest roadblock to an expanded IRA is finding a way to cover the cost. But it could be linked to an entitlement-reform proposal from the Kerrey Commission and pushed as a way to revive the economy. Besides, having failed to deliver on such pocketbook issues as health-care reform, Clinton and Congress will be looking for something to give the voters. An expanded IRA might be the answer.

Paul Magnusson in Washington

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