Election-year smoke, mirrors, hot air


NEW YORK -- If you're drooling over the tax cuts suggested by the president in his State of the Union address, remember this: As a rule, nothing happens in a presidential election year.

Seductive ideas are offered, promises made, and silly to ruinous laws proposed. But that's nothing much more than political exhibitionism, which neither the Congress nor the White House expects to lead anywhere. Every perpetrator relies on his colleagues not to let his outrages succeed.

That, I hope, will be the fate of President Bush's tax approach (it's too improvisational to call a "plan"). On examination, few of the proposals amount to much.

The only change sure to take effect is lower tax withholding. Starting in March, you'll see more money in your paycheck -- but the rise will be so small as to look like a typo

graphical error.

You'll get an extra $2 to $7 a week, which it's your patriotic duty to spend on cars, houses or an extra pair of tube socks. This change affects single people earning $53,200 or less and married people earning $90,200 or less.

L But even that tiny dollop of money is all smoke and mirrors.

The mirrors: You're not really getting a tax cut. You're merely receiving part or all of your 1993 tax refund in advance. When tax time comes, some 8.5 million taxpayers will have to scramble for extra cash. What's more, the change undermines personal thrift at a time when America is savings-short. Tax-refund lump sums are more apt to be saved than is an extra $2 in your paycheck each week.

The smoke: The loss of these funds will cost the government $5.2 billion, forcing it to increase its borrowing. We the people will pay interest on that debt forever.

If you still want your refund in a lump sum, file a new W-4 form with your employer, asking that the same amount of money be withheld as was before.

All of Bush's other tax proposals depend on Congress and most won't go through, at least not unchanged. Or so I hope. Among them:

* Higher personal exemptions. Call this a reward for having babies. For each child under 18, the exemption would rise by $500, phasing out for families grossing over $157,000. The smoke: This tilts toward higher-income families. In 1993, a three-child family earning $40,000 might get $225 and a $140,000 family, $465. And you'd get no help with dependents such as elderly parents.

* IRA withdrawals. The president would let you strip your Individual Retirement Account, without penalty, for (1) uninsured medical expenses, (2) college or vocational-school tuition and (3) up to $10,000 to finance your first home.

The mirrors: The medical withdrawals seem to be good only for tax-deductible expenses -- those that exceed 7.5 percent of adjusted gross income, says Peter Elinsky of KPMG Peat Marwick. Few taxpayers ever meet that test.

As for using an IRA to save for a down payment on a house, the game may not be worth the candle, says Bill Brennan of Ernst & Young. Young people who start saving in the 15 percent bracket, then cash in at the 28 percent bracket, could net more money with an investment out side an IRA.

The smoke: Fraud is practically invited. How would the IRS know if you took a withdrawal to help cover a down payment, then used some of that money to buy a car?

* A tax credit for first-time homebuyers. Well, sort-of-first-time. You'd qualify if you haven't owned for the past three years (more detective work for the IRS) and bought before 1993. Your reward: a 10 percent credit on the price, up to $5,000. The smoke: There's no income limit, so tax money will be spent even on buyers who don't need it. And as usual, no crumbs have dropped off the table for the millions of taxpayers who rent.

* A deduction for losses on your home. You could write off your losses after a sale, to the extent they exceeded 10 percent of your income. The smoke: If you've owned a home before, you have probably rolled past profits into the place you own now. So to get the credit, the price has to drop by enough to erase those past profits, too. In real life, this proposal would mainly benefit first-time owners who bought at a peak, got caught in the real-estate price collapse and now have to move.

* Tightening the annuity rules. Bush would end the tax-deferral on commercially purchased individual annuities, except for people who will convert the savings into a lifetime income.

Annuities bought today, however, still operate under the old rules, which allow a tax-deferred buildup of savings even for people who will cash in at retirement.

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