MARTIN FELDSTEIN offers an economist's version of having your cake and eating it too. The former top economist for the Reagan administration holds that Congress could give savers a tax break through a type of Individual Retirement Account (IRA) and yet not lose government revenues overall and not enlarge the federal deficit.
This thesis should please Senate Finance Committee chairman Lloyd Bentsen. The Texas Democrat has given priority in a massive tax bill moving through Congress to an expansion of the tax benefits for IRAs. That bill was being considered on the Senate floor before it adjourned Wednesday for the Republican convention and a summer break. Debate will continue when Congress returns after Labor Day.
As proposed by Senator Bentsen, fully deductible IRAs would be made available for all individuals, regardless of income or coverage by a pension plan. Effective Jan. 1, 1994, anyone could set aside $2,000 a year in an IRA and not pay taxes on that amount until it was withdrawn at retirement.
Also the Bentsen plan would create a new special IRA to which taxpayers could make nondeductible contributions, but the income would be tax sheltered and after five years withdrawals would be tax free.
The Joint Tax Committee says these two changes would cost $5.83 billion in revenue. Another provision, allowing penalty-free withdrawals for first-time homebuyers, the payment of catastrophic medical expenses, certain educational costs, and for the long-term unemployed, would cost $1.93 billion. This provision would take effect Jan. 1, 1993.
The tax bill passed by the House of Representatives in early July does not contain IRA provisions. So Bentsen, much concerned about the nation's low savings rate, will have to fight for his IRA expansion in a Senate-House conference.
Like much of the tax bill, the IRA provisions are controversial. Tuesday night the Senate rejected by a 72-25 vote an amendment by Sen. John Chafee (R) of Rhode Island to kill them altogether. An amendment by Sen. Howard Metzenbaum (D) of Ohio would have limited the availability of IRAs to couples with an annual adjusted gross income of $100,000 or less and single individuals with $75,000 or less. A compromise put the ceiling at $120,000 and $80,000. At that compromise level, 92 percent of all taxpayers could take advantage of the tax break.
Proponents of an income cap say it will lower revenue losses and assume that those making more than the cap can manage to look after their retirement funds without a tax break. Indeed, as one Republican staff official noted, a millionaire could put money into the new type of IRA and never pay taxes on the income. It would, in effect, be a miniature tax cut on capital gains.
Dr. Feldstein argues in a National Bureau of Economic Research paper that previous analyses of IRA-type plans have exaggerated the tax losses and therefore underestimated the boost in national savings. These analyses have focused wholly on the impact on personal tax payments and ignored a positive effect on the economy and thus on corporate tax revenues. Over time, depending on assumptions, revenue gains would exceed revenue losses. Indeed, Feldstein calculates that a type of IRA plan like Bentsen's new one would boost revenues from the very start.
That was a bit much for one Washington tax expert, who asked for anonymity. He likened it to the proposition by enthusiasts for the supply-side school of economics in the Reagan administration in 1981 that a massive tax cut would involve no revenue losses. Budget deficits instead ballooned.
In any case, he noted, it is the Joint Tax Committee which estimates revenue losses - not Harvard University's Dr. Feldstein.
Supply-side economics is not dead, though. A group of leading Republicans this week was drafting a tax plan that called for an immediate across-the-board income tax rate reduction, dropping the current 15 percent rate to 12 percent and capping the top rate at 28 percent. There are other tax goodies in the plan.
Citizens for Tax Justice, a liberal group, charged the plan would add $250 billion to the deficit. CTJ director Robert McIntyre called it "a `nutcake' strategy."
Of course, the plan has no prospects for passage by a Democratic-controlled Congress. Oh well, it is an election year.