The Next Big Tax-Cut Idea

After pushing through tax reductions in each of the past three years, the Bush team is eyeing another way to trim Americans' tax bills: two tax-free savings accounts with fewer restrictions and much higher dollar limits than the current Individual Retirement Accounts (IRAs).

One plan, called a Lifetime Savings Account, would allow individuals to set aside up to $7,500 a year. The money could be withdrawn at any time, for any purpose, without penalty or tax.

The second, a Retirement Savings Account, would replace current IRAs and more than double the limit on contributions to $7,500. Money could not be withdrawn until retirement age. It would have no income cap, unlike current Roth IRAs, which are not available to couples with adjusted gross incomes over $160,000.

With both accounts, money would grow tax-free, and there would be no tax due when the money is withdrawn. Between the two accounts, each family member could set aside $15,000.

The appeal of these plans would be greatest among the well-heeled. Fewer than 4 percent of eligible workers who make between $40,000 and $80,000 made the maximum contribution to their IRAs in 1997.

Some critics say this is another example of better tax treatment to investment income than to wages and salaries. And some experts say such accounts simply move dollars from existing accounts into tax-free vehicles. But the US needs to raise its personal savings rate. Last year it was 3.7 percent of disposable personal income, down from 7.1 percent a decade earlier.

Analysts said an earlier version of the plans could reduce tax revenues by up to $90 billion a year when individuals begin withdrawing their money tax-free down the road.

The White House must make sure such plans won't raise the long-term federal deficit in the face of pressing national needs such as future funding for Social Security and Medicare.