The Roth Ira Cuts Federal Revenues, with No Benefit to Taxpayers

Abstract

Over the life cycle of an IRA, a Roth IRA will produce substantially lower federal tax revenues than will a regular IRA. With the Roth, the tax is only on the contribution; with the regular IRA, the tax is only on the distribution. Over the long time on average between pension contribution (starting in ones teens or twenties) and distribution (lasting into ones 70s or 80s), tax-free compounding of earnings will make the distribution far larger than the contribution. For example, with a 9% rate of return, a contribution will grow 32 fold over 40 years. Thus a tax on distributions will produce far more revenue than will a tax on contributions. In the example, with constant taxes, 32 times as much revenue.

Yet mathematically, with constant tax rates, the Roth and the regular IRA are equivalents: The exemption of the distributions in a Roth has the same value to the taxpayer as does the deduction of the contribution in the regular IRA. Thus the substantial reduction in federal tax revenues over the life cycle of a Roth provides no benefit to the taxpayer. The article recommends prospective elimination of the Roth IRA.

JEL Classification: H24