With nearly $1.8 trillion in tax cuts rammed through in just three years, the Bush Administration is now addressing the more fundamental business of restructuring the tax code itself. That means not just chopping existing taxes–mainly on the affluent–but shifting the whole focus of the federal government’s revenue-raising activities.
One former Administration official who may be gazing wistfully at the new agenda is Paul O’Neill, who spent much of his brief tenure as Treasury Secretary pushing for an attack on the tax code and the Social Security system rather than the series of cuts that the White House prioritized instead. This year, the Administration is finally pressing forward in the direction O’Neill had favored, with a series of initiatives that would eliminate much if not most taxation of savings and investment, and instead aim the tax collector’s net squarely at workers’ wages.
Health Savings Accounts already became law in December as part of the legislation that created a Medicare drug benefit. HSAs allow individuals to shelter up to $2,600 a year for health expenses, and families $4,500–amounts that will rise with inflation. The second ingredient, expected to be a focal point of Bush’s soon-to-be-released 2005 budget, is a portfolio of three new tax-exempt savings accounts. Retirement Savings Accounts (RSAs) would take over from traditional IRAs and could not be tapped until the saver is at least 58. The same would apply to Employer Retirement Savings Accounts (ERSAs), which would replace employer- sponsored savings accounts such as 401(k)s. Money contributed to Lifetime Savings Accounts (LSAs), the most radical of the new structures, could total up to $7,500 a year per family member and could be withdrawn at any time for almost any purpose.
The third element of Bush’s program is partial privatization of Social Security–essentially, using a portion of the payroll taxes that fund the current system to create voluntary individual retirement accounts. Four new bills offering different versions of such a scheme were introduced in Congress last year. Aides say Bush plans to set partial privatization front and center in his re-election campaign, and he mentioned it prominently in his January 20 State of the Union address.
All three components of Bush’s tax strategy rely on tax-advantaged private savings accounts to pay for services that formerly came from the government or employers–in this case, employee health care and retirement benefits. In all three plans, as well, individuals could pass on the assets to their heirs when they die. Taken together, these changes will allow affluent Americans to shelter hundreds of billions of dollars a year from taxation, effectively rolling back much of the progressive structure that was implemented beginning with the income tax ninety-one years ago.