Bruce Bartlett

One of the hottest documents circulating around Washington today is a highly technical, statistics-laden, 131-page paper by Hoover Institution economist Michael Boskin. First reported by Jim McTague in Barron's on June 16, it estimates that the taxation of pension assets, including Individual Retirement Accounts and 401(k) plans, will yield a $12 trillion (in today's dollars) windfall to the federal government between now and 2040.

Business Week followed up with a major story in its June 30 issue. It noted that if Boskin's numbers are correct, this unexpected revenue stream would make up the entire shortfall in Social Security and Medicare through 2040. This possibility led Rep. Jim Saxton, New Jersey Republican, to declare that gloom over the government's long-term fiscal imbalance is "exaggerated."

In truth, this news is not as much of a revelation as it might appear. I wrote about it 3 years ago based on research (cited by Boskin) by Dartmouth economist Jonathan Skinner. He calculated that, contrary to conventional wisdom, Individual Retirement Accounts actually made money for the federal government.

Skinner did not base his calculations on supply-side economics or anything like it. It was a simple matter of mathematics. Although the federal government loses revenue when people get a deduction for their contribution to an IRA or 401(k), and also loses revenue from nontaxation of annual returns, it gets all the money back plus interest when funds are withdrawn from such accounts and taxed at that time.

That is because the size of the accounts at withdrawal is much larger due to dividends, interest and capital gains, compounded over several decades. Even if one assumes that the tax loss from IRAs causes the deficit to rise, the government still comes out ahead because it borrows at the lowest interest rates possible.

If individuals just buy high-grade corporate bonds, the rate of return will be higher; if they buy corporate stock, the return will be much higher. Therefore, the government gets more than enough extra revenue to compensate for the revenue loss and the interest expense resulting from it.

All withdrawals from tax-deferred accounts except Roth IRAs are taxable and always have been. Moreover, if someone should die with a balance in their IRA (including Roth) or 401(k), their heirs must pay tax on it at ordinary income tax rates -- losing the benefit of lower tax rates on capital gains and dividends. This will be true even if the estate tax is abolished.


Bruce Bartlett

Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.

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