Fiscal Insanity: Paying for Tax Cuts With More Tax Cuts

Last year, in a supposed effort to impose some fiscal discipline, Congress limited itself to $70 billion in tax cuts over 10 years in the tax package currently under consideration in Congress. But the bill put together by conservatives includes far more than $70 billion in tax cuts over ten years, mostly for the wealthy, and they figured out an inventive way to get around the limit: more tax cuts.

Here’s how it works. Traditionally, very wealthy people are not eligible for an extremely tax-favorable kind of retirement account called a Roth IRA. As a revenue raising gimmick, Congress decided to remove the income restrictions on Roth IRAs for one year (2010). In the short term, these wealthy people will switch from their current retirement accounts to the Roth IRA, providing a quick influx of $6.9 billion to the treasury during the 10 year window. (The money is taxed when it is transferred.)

But over the long term, this shift will swell the federal debt even more. Once the money is transferred to Roth IRAs, it is never taxed again. Overall, the treasury “would lose $37 billion in revenue from the Roth IRA provision from 2013 to 2049.

The measure passed the House yesterday and is expected to clear the Senate today. Of course, whatever problems this kind of policy creates in the future, we can always solve them with more tax cuts.