The Administration's USA Account Proposal (Part 3 of 3): Part Three: Why It Won't Work as Crafted

The Administration's USA Account Proposal (Part 3 of 3)Part Three: Why It Won't Work as CraftedC. Eugene Steuerle"Economic Perspective" column reprinted withpermission.Copyright 1999 TAX ANALYSTSThe nonpartisan Urban Institute publishes studies, reports,and books on timely topics worthy of public consideration.The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees,or its funders.The Clinton administration wanted to put forward a private pension proposal that would involve additionalsaving, particularly for low-income individuals. Similar in ways to the individual accounts proposed in manysocial security reforms, Universal Savings Accounts would encourage additional pension saving, increasewealth ownership among those in the middle- and lower-income classes, decrease the inequality of privatewealth, and make more even the distribution of tax subsidies for pensions.Laudable as those goals might be, the fatal flaw in the administration's strategy is that it is not integratedeither with social security reform or with further reform of the private pension system. Accordingly, if adoptedas proposed, USA accounts would increase substantially the administrative burdens imposed on taxpayersand the IRS. Some parts of the proposal would be very hard to understand, and, as one consequence,participation could be reduced.Start with Treasury's first problem in developing the USA proposal. The amount of revenues to be madeavailable was determined politically before a draft of a proposal had even been developed. The amountwasn't all that large relative to the pension needs of individuals. That led Treasury to its first distinction froma more traditional design. It decided to make voluntary contributions to USA accounts come out of after-taxincome, rather than, like most pension accounts, before-tax income.Why? In the early years, based on only fixed amounts of revenue to be spent on the credit that would helpfund the individual accounts, the revenue loss from the entire proposal would be reduced. Down the road,however, the up-front payment of taxes would be offset a bit by reduced taxes on withdrawals.Unfortunately, this simple decision had a number of perverse consequences for tax policy. It added all sortsof layers of complication. One came when some alert person noted that the administration probably wanted toallow voluntary contributions to 401(k) plans to qualify as personal saving in much the same way as voluntarycontributions to the USA account. But that required yet another correction. The drafters of the proposal hadjust required the voluntary contribution to the USA account to come out of after- tax income. To reduce thatdisparity, Treasury decided that "[b]ecause contributions to a 401(k)-type plan are excludable from taxableincome while USA contributions are not, joint filers with AGI of more than $50,000 ($25,000 for single filers,$37,500 for head of household filers) who elect to receive government matches will be required to include intaxable income 80 percent of the portion of the 401(k) contribution that is matched."That offset, therefore, represents an attempt to provide rough parity for those who enter in through a 401(k)door and those who enter in by way of voluntary contributions. Because it's rough, however, it grantsdifferential tax benefits to the same individual just depending on which door he or she enters. It is not somuch the inequities involved as the complication that is most bothersome.Note also that a taxpayer with both a 401(k) and the ability to contribute through a separate individualaccount may decide to do alternative calculations of which would be better—in longstanding opposition toTreasury's traditional position that these types of options are not good tax policy. Meanwhile, at the time ofwithdrawal, only 85 percent would be taxed, so withdrawals from this account would look different than thosefrom other pension plans, again adding to the complexity of understanding and filing.Tax policy analysts have also noted for years that it is not necessary to try to introduce progressivity intoevery provision in the code—that this is likely to violate simplicity standards without being more progressive.(See testimony of Eugene Steuerle before the Oversight Subcommittee, Committee on Ways and Means, May25, 1999, on introducing phaseout after phaseout into the tax code. Doc 1999-18680 (14 original pages).)One can usually adjust the rate schedules or some basic credit amount (e.g., social security minimum) toDocument date: June 07, 1999Released online: June 07, 1999 achieve an equal degree of progressivity.Because the administration did not want to deal with social security or private pension or tax reform,however, it decided to tackle progressivity within the confines of the USA account proposal only. Therefore, itcreated several phaseouts of benefits. Both a base credit amount, called an "automatic tax credit," and a"matching tax credit,"