Wednesday, July 23, 2008

Does Al Franken want to kill IRAs? 

MPR reports on Al Franken's tax plan:
Franken wants to expand the dependent care tax credit to cover more than one-third of child care costs for families earning up to $100,000.

He would create a $2,000 tax credit to help families take care of elderly or ill relatives. Franken is also calling for an expansion of the Family and Medical Leave Act to cover millions more workers.

And he wants to eliminate the retirement savings tax deduction in favor of a 30 percent government match of every dollar a worker saves for retirement.
As one correspondent notes, the IRA deduction is valuable only if you have taxable income to deduct against. 25% of family heads had an IRA; 40.1% of families 55-64 own at least one. (Source.)

The article does not make clear what the benefit would be of the Franken plan. Imagine, for example, a young couple with a home that had appreciated (even despite the current declines in home prices.) Can they withdraw equity from their home, put it into a Franken plan and collect an extra 30%? Sounds like a good deal, but it puts the home at more serious risk of foreclosure if property values were to decline (further). Attanasio and DeLeire (2002) argue that all of the contributions to IRAs were shifting savings from taxable to tax-preferred forms. The Franken plan would likely do more of that.