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106 IRET Byline 1 (1992)

handle is hein.taxfoundation/iretbyln0106 and id is 1 raw text is: August 19, 1992 No. 106 Universal IRAs Will Yield Universal Benefits The Individual Investment Account Act of 1992, IRET Bi H.R. 5671, introduced July Representatives Dick Schulze and Ed Jenkins, is one of the boldest, most imaginative, and most con- structive pro-growth tax proposals in many years. The bill would establish unlimited IRAs that would permit taxpayers to defer taxes on saving without restrictions as to amount of saving or time of withdrawal. The bill would all but eliminate the income tax bias against individual saving. It would contribute to higher levels of saving, investment, productivity, and income than now exist. The unlimited IRAs would hav features: 3, 1992, sales or excise ... all saving contributes to capital formation, produc- tivity, and national income, regardless of the motive behind it. There is no economic reason for the government to discriminate against or discourage any type of saving. the following * Unlimited tax deduction for IRA saving. * In addition to currently-allowed IRA vehicles, tax deductible premiums for life insurance if proceeds are payable into an IRA. * Tax-free investment growth until withdrawal. * No penalty tax on withdrawal at any age. * No forced distribution at any age. * No income tax at death. Heirs may maintain the IRA with the benefactor's cost basis. * No estate tax - IRA accumulations would be excluded from the gross estate. tax to be paid). However, if the income is saved, the earnings of the saving are taxed again and again (and, if later used for consumption, may also face excise or sales taxes). The income tax thus raises the cost of saving compared to that of current consumption. A neutral tax code would not penalize saving relative to consumption. There are two ways to make the taxation of saving and consumption neutral. Either income that is saved should be exempt from tax (as in the case of traditional IRAs, 401(k) plans, etc.) and the earnings of the saving and the principal taxed upon withdrawal, or the amounts saved should be taxed when earned but the earnings should be tax exempt (as in the case of tax free securities or the back-ended variant of the IRA offered in the Bentsen-Roth bill). The bias in the income tax extends to all taxable saving, not just that for retirement. Consequently, to create a neutral tax system, all saving, whether for retirement, buying a house, college tuition, a new car, a vacation, or protection against a rainy day, should receive the same treatment as in a tax-deferred income plan or in one form of IRA or other. Institute for Research on the Economics of Taxation * Rollover of up to $15,000 (indexed for inflation) from an IRA into the first purchase of a principal residence (with an equal reduction in the tax basis of the house). * Tax-free rollover into the IRA of the proceeds from the sale of a principal residence. IRAs have traditionally been justified as an incentive for taxpayers to save for retirement. This is too narrow a focus. IRAs should be thought of instead as a very limited means of offsetting the current bias in the income tax against saving. Income is taxed when earned. If the income is used for consumption, there is no further federal income tax imposed (though there may be a small IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1331 Pennsylvania Ave., N.W., Suite 515, Washington, D.C. 20004 Phone: (202) 347-9570

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