|
|
Get Four
|  | MAY 10, 2006
By Howard Gleckman Congress' Playing With NumbersWith the new tax bill, the politicians are pulling the ol' bait and switch. Congress is disguising a huge tax cut as a revenue generatorIn recent years, Congress has made a fine art of gaming the tax code. But it has just outdone itself. It's about to pass a bill that includes a measure Congress is portraying to upper-income taxpayers as a big tax cut, while at the same time it counts the move as a tax increase for bookkeeping purposes. First, the pitch to taxpayers (read: voters): The bill Congress is about to pass promises wealthy people that they'll be able to convert their standard Individual Retirement Accounts into Roth-type IRAs. This would be an incredibly sweet deal, since retirees can withdraw money from a Roth IRA entirely tax-free. That can be much better than regular IRAs, where investors must pay tax on distributions, even after retirement. The duplicity doesn't end there. There's a good chance taxpayers will never see the benefits that Congress is trumpeting for them. Upper-bracket taxpayers will have to wait four years before they'll be able to roll over their IRAs. That's right, until 2010. With a new President and a different Congress at that time -- as well as expected big budget deficits -- there are real questions about whether the measure will ever take effect. MOUNTING COSTS. At the same time, the supposed tax increase will turn into a money-loser for the federal budget. The Roth rollover is portrayed as a revenue generator, because people pay taxes in the early years as they convert from traditional IRAs to Roths. (They save money in later years because they're not paying taxes on withdrawals.) That's expected to bring in $9.2 billion between 2011 and 2013. But then in 2014, the measure will start losing the government money. The cost is estimated at $1 billion in 2014 and $1.3 billion in 2015, and it will certainly increase from there. But Congress stops counting 10 years out -- so it doesn't recognize most of the lost revenues. Its numbers include the good news, but not the bad. What's going on? It's a bit complicated, so sit down and take a deep breath. SLICK DEAL. After months of negotiations, the White House and congressional Republicans have agreed to a tax-cut bill that extends the low 15% rates on capital gains and dividends for two years -- from the end of 2008 through 2010. It also gives about 15 million taxpayers relief for just 2006 from the dreaded Alternative Minimum Tax. No surprise there. Lawmakers have been trying to nail down this package for six months. And Congress is expected to pass the measure within days. But here's where the real weasel deal comes in. Last year, Congress agreed that this tax cut would be no more than $70 billion over 10 years. Since Congress is running $300 billion-plus deficits, one may wonder why Washington is still cutting taxes at all. One may further wonder why lawmakers would want to give the Roth IRA tax break to wealthy investors who merely shift assets from one account to another, and add nothing to national savings. But whether you think the overall tax bill is a good idea or a bad one, one thing is certain: This bill will cut taxes by a lot more than advertised. So, to squeeze into that $70 billion box, Congress needed to find some new revenues -- at least on paper. One of them, it turns out, is the Roth conversion provision. IT'S A TAX WINDFALL. Because the Roth conversion generates revenues in the first few years, Congress can use it to stay within the $70 billion limit. The truly big losses for the federal government don't come until the middle of the next decade, so Congress doesn't count them against its self-proclaimed cap. This is all part of a delicate waltz. Congress needed to time the Roth rollovers so people would pay taxes on their conversions, but not let them happen so quickly that the provision would look like what it really is, which is a huge tax windfall. So, the pols decided to allow the switch from regular IRAs to Roths only in 2010. That lets Washington count the rollover tax as new revenue to help offset the cost of the other tax goodies in the bill. But will the provision still be there in 2010 when people are expecting to convert? Don't bet on it.  Gleckman is a senior correspondent for BusinessWeek in Washington
BW MALL
SPONSORED LINKS
Get BusinessWeek directly on your desktop with our RSS feeds.
Buy a link now! Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2006, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
