NCPA - National Center for Policy Analysis


June 21, 2004

In the 2004 Budget, President Bush proposed to simplify and expand saving incentives. Instead of choosing from among a bewildering array of narrowly focused accounts, individuals would be able to save much larger amounts in a Lifetime Savings Account (LSA) usable for any purpose and a Retirement Savings Account (RSA) designed for retirement.

To determine the cost-effectiveness of Bush's tax savings incentives, one should compare the private capital added to the tax revenue lost, says R. Glenn Hubbard, a former chairman of the President's Council of Economic Advisers. For tax-deductible IRAs, Hubbard calculated that, in present values:

  • If just 26 cents of each dollar contributed to an IRA is new saving, that 26 cents generates $2.21 of new capital for each dollar of tax revenue the government forgoes.
  • If the tax subsidy is financed by borrowing (thus removing funds from the capital market) we get $1.21 of new capital, on net.
  • If as much as 40 cents of each dollar is new saving, we gain $4.31 of new capital for each $1 of tax subsidy.

When the corporate income taxes paid on profits generated by the higher capital stock are included the results are even more dramatic, says Hubbard:

  • If 26 cents of each dollar contributed is new saving, then $4.84 is added to the capital stock for each net dollar of revenue lost.
  • If each dollar contributed contains at least 40 cents of new saving, the tax cut actually pays for itself.

These results would be even more favorable if the same calculation were performed for Roth IRAs, and LSAs and RSAs, since taxes have already been paid on the wages deposited to these accounts, says Hubbard.

Source: R. Glenn Hubbard, "Bush Savings Incentives," Brief Analysis No. 477, National Center for Policy Analysis, June 21, 2004.

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