Now that Bill Clinton has made known his intention to veto the GOP tax cut, an alternative tax reduction plan is urgently needed. We must get surplus tax payments back into the wallets of Americans before the old-bull Republicans and Democrats sit down at the budget negotiating table and engage in a bipartisan spending feast.
And we must construct a populist tax package that will take a big sliceout of every American's tax bill? How? The simple answer is: Look to thepayroll tax. For about 2-of-every-3 working families in America today, the 15.3percent FICA tax is the single biggest eraser of worker paychecks. Nowadays afamily of four with an income of $25,000 a year, forfeits about $3,750 throughoutthe year in payroll taxes alone. How can liberal Democrats possibly oppose liftingsome of this tax load off the poor?
We hear it said repeatedly of late that Americans have lost their saving ethic. The consumer society, we are told, impels Americans to greedilyspend every paycheck as fast as we can earn it. We Americans evidently demandinstant gratification, so we spend on every hot new consumer item from Pokemoncards to Porsches.
But this analysis is wrong. The major reason the official U.S. savingsrate (a very flawed statistic) has tumbled is not because Americans are behaving selfishly, but rather because our tax system behaves dysfunctionally. Ifwe want Americans to save and invest more, then at the very least our incometax code should stop penalizing these activities.
The federal income tax doubles and in some cases triple taxes Americanswho save. First, we tax a worker's income when it's earned. Next, if themoney is invested rather than instantly consumed, we tax the capital gains onstocks; we tax the income of the businesses that we own the stocks in; if there are dividend payments, the government imposes a levy on those too. We even taxthe 3 percent or 4 percent interest income on basic savings accounts. If we are fortunate enough to die with money left over after paying all those othertaxes, the tax collector robs the grave by snatching away up to 55 percent of the estate. No wonder one of America's top-selling financial self-help books advises Americans to "die broke."
What is maddening is that many of the same Washington pundits who defend these multiple layers of levies, have the audacity to lecture Americansthat they aren't saving enough.
It is to relieve the anti-savings bias in our tax code that Larry Kudlowand I have developed an idea we call "2+2 Savings Accounts."
There are two parts to the plan. First, every worker would be given the option of diverting 2 percentage points of the employer share of thepayroll tax into a personally directed Individual Retirement Account (IRA). Wherewould the money come from to pay for this? Simple. From the payroll tax surplus,now running at more than $100 billion a year.
For the past 15 years, Congress has made Bonnie and Clyde look likeamateur bank robbers by stealing more than $500 billion from trust fund surplusesto spend on other programs in the budget: from honey bee subsidies to peanutbutter research to corporate subsidies. The only way to end the looting of theSocial Security fund is to place those dollars directly into worker's retirement accounts.
The second part of the "2+2 Accounts" is to allow every single American worker to place an additional 2 percent of their paycheck into a tax freeIRA. (This would be on top of existing IRA allowances.) The money for the IRAswould come from the projected "on-budget" surpluses over the next 10 years.
So under the 2+2 plan, the typical American could lay away 4 percent ofhis or her paycheck (2 percent from the payroll tax plus 2 percent from a newIRA) in a personal nest egg. Because half the money comes from the payrolltax, even the lowest income families in America could take advantage of my plan.For the first time in their lives, young and low-income workers would have the opportunity to amass real wealth. What better way to give America'sworkers - from teachers to construction workers to bus drivers to computerprogrammers - access to the American dream than by allowing them to build up privateequity?
If a couple with a combined income of $30,000 a year takes advantage ofthe full 4 percent private savings option, then they will be investing $1,200a year tax free. Thanks to the power of compound interest, if that couple invests$ 1,200 a year from age 22 to age 65, and they earn the average historicalrate of return in the stock market, they will retire with nearly $400,000.
Under "2+2" savings accounts workers should be permitted to withdrawmoney penalty free from these accounts for purposes other than just retirement. Parents should be permitted to draw money from these accounts to pay for education expenditures. Workers should similarly be permitted to takemoney out of these savings accounts to pay for medical expenditures for themselves,their children, or elderly parents. If workers became temporarily unemployed,they could draw funds from their 2+2 account until they get back on their feet.
Bill Clinton and Al Gore are unshakable in their faith there should be a government agency to solve every problem that families face in Americatoday. The virtue of 2+2 savings accounts is that Americans won't need to bereliant on the false promises of the government nanny state, because over time these accounts will allow Americans to be financially self-reliant.
Most Americans believe the $2 trillion of tax surpluses over the next 10 years should be used in ways to help future generations. Leaving themoney in the hands of fat and happy politicians whose time horizon is only as faroff as the next November congressional election, will hardly help our children. Allowing every working American to have the dignity to build up a pool ofreal personal savings will.