NCPA - National Center for Policy Analysis

President Bush is Moving Closer to Ideal Tax Reform

March 14, 2003

President Bush has unveiled three new proposals to promote saving and to simplify its tax treatment.

Lifetime Savings Accounts (LSAs) would let people set aside $7,500 (for 2003, indexed for inflation in future years) in after-tax funds from any source each year in addition to any other saving plan.

  • Earnings would be tax free and there would be no income limits on participation, no minimum holding period and no restrictions on the use of the money.
  • LSAs would be ideal for low-income savers who cannot afford to save separately for retirement and emergencies, and who are hesitant to put money in IRAs because of the penalties imposed on early withdrawals.

Retirement Saving Accounts (RSAs) would replace current deductible, nondeductible and Roth IRAs.

  • As with Roth IRAs, there would be no tax deduction for contributions and no tax on withdrawn earnings.
  • RSAs would have a higher annual contribution limit than current IRAs - $7,500 in 2003, indexed for inflation in future years - with no income limits on participation.

Employer Retirement Savings Accounts (ERSAs) would simplify defined contribution plans to enable more companies to offer such plans to their employees. ERSAs would replace future contributions to 401(k), 403(b) and government 457 plans, SARSEPs, and SIMPLE IRAs.

Taken together, the President's proposals would largely eliminate the income tax bias against saving and would approach the tax reform ideal. His dividend and capital gains proposals would end the double taxation of corporate income, but their larger effect would be to relieve the personal income tax bias against saving. The President also proposes permanently to triple the amount of investment that small businesses may expense - from $25,000 to $75,000 - thus lowering their net cost of capital.

Source: Stephen J. Entin, "The Bush Tax Plan: Tax Reform in the Making," Brief Analysis No. 433, National Center for Policy Analysis, March 14, 2003.

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