Tax Policy Analyst
The House Republican “2.0” tax plan contains new provisions that are supposedly aimed at promoting savings, the most troubling of which is a proposal to introduce “Universal Savings Accounts” (USAs). A USA is a new type of tax-preferred account that’s similar to a Roth Individual Retirement Account (Roth IRA) but would have no income limits for participation and would let an individual withdraw funds before retirement. As we’ve written, the USA is fundamentally flawed: it would do little to boost private savings, drain federal revenues, and overwhelmingly benefit the nation’s wealthiest households.
The USA proposal would come along with the centerpiece of the House 2.0 plan, which is its permanent extension of the 2017 tax law’s individual provisions that are slated to expire after 2025. As we’ve explained, that extension would be fiscally irresponsible and would favor the wealthiest Americans.
As for USAs, they would:
The main effect of USAs, therefore, would likely be that some households would shift assets from taxable investment and savings vehicles — including regular savings accounts, the interest income from which is taxable — into USAs and receive a tax cut without increasing their savings.
The cost may also be understated if some people shift new contributions from an existing tax-preferred account, such as a 401(k) or traditional IRA, to a USA account, since that would change the timing of their tax benefits; the existing accounts provide their tax benefits up front rather than at a future time of withdrawal. That would make the costs smaller in the first ten years than in subsequent decades without reducing their actual, long-run cost.
USA benefits are tilted to the top in another important way: the tax savings would be proportional to a household’s tax rate on investments. Take, for instance, capital gains — the gains from the sale of stocks or other assets. The top tax rate on long-term capital gains is 20 percent, but the rate is 0 for a married couple making up to about $100,000. Thus, that married couple would receive no additional tax benefit from holding such assets in a USA as opposed to a taxable account; either way, the couple would pay no tax on the gains. More than 70 percent of filers would fall into this group (see chart). By contrast, a married couple making $1 million a year would get a significant tax advantage by shifting its assets into a USA: rather than pay a 20 percent tax on any capital gain, it would pay no tax at all.