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![handle is hein.taxfoundation/iretcgadv0086 and id is 1 raw text is: September 17, 1999 No. 89
A BETTER TAX SYSTEM THROUGH
INDIVIDUAL INVESTMENT
ACCOUNTS
Tax-deferred personal saving accounts, such as
401(k)s and individual retirement accounts (IRAs),
are extraordinarily good tax policy. They bring
together three of the most desirable properties that
can be found in a tax: efficiency, simplicity, and
fairness. Moreover, they offer the bonus of being a
way station on the road to
fundamental tax reform, if the
nation decides to move in that [Indi ial In
direction. would essenti
Representative Jim IRAs without
McCrery (R-LA) and Senator the governe
John Breaux (D-LA) recognize contributions
these virtues. For several HAs would h(
years, Rep. McCrery has of IRAs with
introduced legislation in the due to current
House to establish Individual
Investment Accounts (IIAs),
and Sen. Breaux has sponsored
companion legislation in the Senate. Their bills are
based on a proposal by the Savers & Investors
League. The legislation currently before Congress
is the Individual Investment Account Act Of 1999
(H.R. 1611 and S. 1471).
IIAs can be thought of as super IRAs. As
with deductible IRAs, individuals would defer tax
on amounts they contribute to IIAs but pay tax on
gross distributions from IIAs (i.e., deduction for
contributions, no tax on earnings within the account,
full income tax on all withdrawals). This
combination ensures that individuals would be
subject to income tax at one point along the saving
stream, but would protect them from being taxed
repeatedly when they save. IIAs differ from IRAs
because they would give individuals the freedom to
choose the timing and size of contributions and
withdrawals without government second guessing.
In effect, IIAs would be unlimited deductible IRAs.
Taking the Advantages of IRAs and Improving
on Them
IIAs would essentially be deductible IRAs
without the many restrictions the government now
imposes on contributions and withdrawals. Being
unlimited IRAs, IIAs would have all the strengths of
IRAs without the weaknesses due to current-law
restrictions.
Tax Neutrality. A key advantage of IRAs is
that they are
v estment Accounts]
ally be deductible
he many restrictions
nt now imposes on
and withdrawals...
ive all the strengths
out the weaknesses
-lawv restrictions.
neutral between saving and
consumption. They provide
for equal income tax treatment
of an individual's funds,
whether the individual uses the
funds for personal saving or
for immediate consumption.
In either case, the funds are
taxed just once. This neutral
treatment overcomes a major
income tax bias.
Normally, individuals pay
income tax only once on
earnings they use for
consumption (income tax applies to the earnings but
not to the consumption), but they pay income tax
repeatedly on earnings they save (income tax applies
to the earnings that are saved and income tax also
applies to returns on the saving). Because the
income tax bias reduces the reward for saving (or,
equivalently, lowers the price of consumption
relative to saving), it discourages saving. The
government-created bias means less investment and
a smaller capital stock and, thus, weaker pro-
Institute for
Research on the
Economics of
Taxation
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public about policies that will promote economic growth and efficient operation of the free market economy.
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