March 04, 2003

Recently President Bush proposed a savings plan that calls for creating two types of personal saving accounts to replace the Individual Retirement Accounts. Most employer sponsored retirement plans would also be replaced by an Employer Retirement Savings Account. The President's savings plan has everything that a supply-sider could hope for, it eliminates the double taxation of savings by effectively reducing the capital gains tax rate to zero, and in true supply-side fashion, the implementation of the plan is loaded with incentives to induce people to voluntarily front-load the tax payments. This later feature should ease the concerns of the static deficit mongers. However, as the press now reveals, that is not the case. Some of the criticism directed towards the savings plan is that while it will generate revenues in the present, it will reduce them in the future. This is what we call selective dynamic analysis. The critics concede that behavior will change; yet they do not anticipate higher savings, investment and/or economic growth. If they are to concede that behavior will change at least they should pay lip service to the possibility that future growth will also change.

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