New tax aimed at savings

In the coming battle over tax policy, one little idea holds some big promise

Published: November 13, 2004

The looming political battle over how to reform the tangled U.S. income tax code could get ugly. But one option, a tax aimed at boosting savings, holds promise.

The Unlimited Savings Allowance (USA) Tax, a form of consumption tax, has made little public splash so far.

But in 1996, the height of the last big Washington lurch toward tax reform, it was considered a leading contender for adoption, along with the flat tax and a national sales tax.

Now, with the United States facing record budget deficits and dependent on foreign capital flows because of the low domestic savings rate, the USA Tax may get another hearing.

The Bush administration plans to name a bipartisan panel soon to suggest tax reforms. President Bush has said generally the code should be "simpler, fairer and more pro-growth" but has declined to be more detailed.

"New covenant"

At its core is the idea that saving and investment are good and should be encouraged by the tax code.

The USA tax would allow taxes to be deferred on income that is saved or invested until that money is spent. It would also allow some current popular deductions to be retained, including those for charitable giving and home mortgage interest.

Advocates say such a move would give individuals greater power over their tax bills, by deciding how much to spend or save. They also say it would be progressive, keeping the current tilt of the tax code for higher rates on the rich and lower ones for the poor.

Laurence Seidman, an economics professor at the University of Delaware and author of "The USA Tax: A Progressive Consumption Tax," has proposed a twist on the original idea: keep current income tax rates and brackets the same, but apply a USA Tax to the wealthy in place of the existing estate and alternative minimum taxes.

Seidman calls his idea "a new covenant with the affluent," who are small in number yet pay a large part of overall taxes.

Scrapping the estate tax and the AMT should please conservatives, while liberals should be soothed that the code will maintain its progressive rates.

"We've got to have progress in tax reform but it still has to be fair," said Seidman.

Some of the administrative headaches of the USA Tax, such as the difficulty in tracking all income and its disposition, will be more easily borne by wealthy taxpayers, Seidman said, since they already employ accountants and attorneys to help with their taxes.

However, Seidman was not sure his proposal would raise as much revenue as the taxes it would replace, a critical hurdle in the current budget environment.

Support unclear

To get anywhere, though, the idea will need backing on Capitol Hill, and how much support it would have is unclear.

In 1996, the USA Tax had bipartisan backing from then-Democratic Sen. Sam Nunn of Georgia and Republican Sen. Pete Domenici of New Mexico. A spokeswoman for Domenici this week said it was too soon to say what the senator's stance will be on tax reform.

On the House of Representatives side, Rep. Phil English, a Republican from Pennsylvania, has pushed what he calls SUSAT, or Simplified USA Tax.

This would allow for unlimited contributions of after-tax income to an IRA-type account and repeal estate and gift taxes. It would also cut income tax rates.

A spokeswoman for English said he plans to introduce SUSAT legislation again this year.

William Gale, a scholar at the centrist Brookings Institution think tank, said Seidman's idea of a grand bargain -- trading estate and alternative minimum taxes for a USA Tax on the wealthy -- was "interesting."

But he also said the outcome of the tax reform debate will depend on whether the Bush administration is about reforming the code rather than simply cutting taxes.