Upper-middle-class taxpayers love Individual Retirement Accounts, and Washington is eager to oblige. At present, families with incomes over $50,000 a year can’t make tax-deductible IRA contributions if they’re covered by pension plans, and lower earners are limited to $2,000 a person or less. Sens. Lloyd Bentsen and William Roth want to ease the restrictions and allow withdrawals to pay for houses, college tuition or medical expenses. Bush is expected to offer a “Family Savings Account”; contributions would come from after-tax income, but dividends and interest would never be taxed.
What’s wrong with that? For starters, it won’t raise the savings rate significantly. Under the liberal rules in effect during the early 1980s, most money going into IRAs was simply shifted from other accounts to save on taxes. If it becomes easier to withdraw money before retirement, more taxpayers will just substitute IRAs for regular savings. And increasing household savings accomplishes nothing if that adds to the federal deficit, which is the biggest drain on national savings. The main beneficiaries: high-income families with money to save. Despite the negatives, don’t bet against this horse. It’s a sure winner.
The auto industry and its friends, led by Sen. Donald Riegle and Rep. Philip Sharp, would give buyers of new American cars a tax credit of about 10 percent of the price-depending on how many of the parts are made in the United States. Estimated cost: $6 billion. This incentive to spend, of course, conflicts with the IRA proposals that would encourage less consumption and more saving. And why subsidize people who buy cars rather than, say, people who buy furniture? This may look like too much of a special-interest measure to pass, even in an election year.
Bush is expected to propose a $2,000 tax credit for families that purchase their first home during the next 12 months, playing to construction workers while aiding the children of the middle class-if they happen to be sitting around with loads of cash waiting to buy a house. Does housing deserve special help? “I’m not sure we haven’t already done that with interest-rate cuts,” says John B. McCoy, chairman of Banc One Corp. Most economists think the credit would be ineffectual-and if it does work, it will do so by diverting capital from business investment. But the idea ranks high for sex appeal.
Commercial real estate’s in a slump, so the industry that overbuilt thanks to tax breaks may get more. Senate Republicans, led by Minority Leader Robert Dole, want to restore deductions for investors who suffer losses, which were cut in 1986. Bush may go along but try to limit the break to full-time real-estate investors. Backers say the change might save money by raising prices of hotels and office buildings, thereby aiding weak banks and cutting the government’s losses from the savings and loan mess. “That’s one of the most absurd things I’ve ever heard,” counters Ronald Boster, an aide to Willis Gradison, an influential House Republican. David Shulman, head of real-estate research at Salomon Brothers, says limiting the break to full-time investors will have little impact on prices and broadening it to cover all property investors would hurt the economy: “It doesn’t make sense to allocate capital to empty buildings.” Still, some deduction for building owners may pass. Explains Van Doorn Ooms of the business-backed Committee for Economic Development, “Everybody’s being lobbied to death by the real-estate industry.”
Republicans and Democrats alike are well aware tax cuts are fiscally irresponsible. The past month’s sharp drop in interest rates should lead to an upturn by spring; by the time a new tax law kicks in, recession will be yesterday’s worry. “If it weren’t an election year, I doubt George Bush would be plumping for any fiscal stimulus at all,” says Washington tax lobbyist Mark Bloomfield. “But presidents and Congress don’t listen to experts during an election year–they listen to the electorate. " Surveys, however, show that voters are as concerned about the economy’s long-run competitiveness as about today’s unemployment rate. The irony is that for all the politicians’ pandering, the public may not be fooled.
