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Wednesday, February 5, 2003

Only the little people

Last month I used this space to take a look at President Bush's proposal to stop imposing the federal income tax on dividends that Americans receive from corporations. I noted then that this change could be the beginning of a gradual shift away from an income tax and toward a wage tax. My comments included this:

The President says dividend income shouldn't be taxed. Maybe if he gets re-elected, next term he'll say interest shouldn't be taxed, either -- bonds should be treated the same as stock. Sounds plausible. Then the real estate lobby jumps up, and the next thing you know, rents aren't taxable income, either. The oil and mining folks grease a few campaign palms, and before long royalties are exempt, too. Somewhere in the shuffle, the tax on capital gains, already very low, and the tax on other income from property sales can be dispatched as well.

At that point, the only kind of income that will be left to tax is income from labor. Now that's a hot dream for the GOP.

Well, I was wrong about our fearless leader. He does not in fact plan to switch over to a wage tax eventually.

He plans to switch over right away.

Last week, just before we all had our attention spans confiscated by the Columbia disaster, the White House released a tax proposal that was labeled an expansion and simplification of the IRA rules. The proposed tax law changes would do those things, all right, but they would do much more. They would create new types of savings account called "lifetime savings accounts," or LSAs, and "retirement savings accounts," or RSAs. The new LSAs wouldn't have to be used for retirement; they could be used for any purpose, and their tax-free nature would still prevail. With RSAs, the money can be spent freely as soon as the taxpayer reaches the ripe old age of 58.

In effect, these changes would forgive the income tax on many different kinds of income from property. As one analysis explained it:

The new program would allow individuals to sock away up to $15,000 of their after-tax income each year into two separate accounts, with no taxes on any earnings from their savings. Each year, the maximum contribution would rise with inflation. All of the money in the new Lifetime Savings Account could be taken out at any time tax free, while the money set aside in the expanded Retirement Savings Accounts would remain saved until age 58, except in cases of death or disability.

"That's going to take care of almost everybody's saving," said Gary V. Engelhardt, an associate professor of economics at Syracuse University. Except for the wealthiest families, the $30,000 that a married couple could put aside every year would be more than enough to cover what they can afford to save. "Effectively all your saving is going to be sheltered," Engelhardt said.

If Congress were to pass the Bush plan, here would be the new scorecard: Dividends wouldn't be taxed at all any more. And neither would rent, interest, capital gains, or royalties, so long as the real estate, bonds, CDs, bank balances, or other income-producing assets are held in the new accounts. Taxpayers would be permitted to add $15,000 a year of new assets to their LSAs and RSAs, so that after 20 years of lifetime saving, the balance would be $300,000, plus the earnings on that balance as it grew over the 20 years. At 5% return, a 20-year investment plan like this would result in a tax-free account of about $496,000. At that point, the account would generate nearly $25,000 a year of tax-free income if earning 5%. That may not be enough to live off, but combined with unlimited tax-free dividends on stocks, of course it would be. (Note that the contribution limits would be increased each year for inflation; the numbers here are in constant 2003 dollars.)

For a married couple, the numbers would doubtlessly double. So after 20 years the balance would be around $1 million, and the tax-free interest, rents, capital gains, and royalties would run nearly $50,000 annually. Plus all the tax-free dividends you can eat.

Leona Helmsley once went to jail for her belief that only the little people pay taxes. Under the Bush plan, her distorted view would become the law of the land. Those who can afford to sit back and live off their investments -- corporate stocks, and other assets in the LSAs and RSAs -- would pay no federal tax whatsoever. Meanwhile, people who have to work for a living will continue to be taxed twice -- first under the income tax, and second under the Social Security tax.

"Saddam is the devil!" Bush tells us. "I weep for the brave astronauts!"

Hey, I've got one hand over my heart saying the Pledge of Allegiance, "under God" part and all. But with these guys running things, unfortunately you have to keep your other hand on your wallet. They are bold thieves, indeed.

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