The aim of a tax incentive, like being able to deduct IRA contributions, is to encourage individuals to make decisions that provide enough of a benefit to society that offsets the incentive's cost to the government in terms of lost tax revenue.
In the example of deducting IRA deductions, there is the value of having a retirement population living off their savings, rather a retirement population dependent on the government, or on the income or savings of other members of that society. The drafters of IRA tax incentive placed enough of a value on its benefit to justify its cost in lost tax revenue.
The IRA tax incentive however provides little additional benefit were it offered to those earning higher amounts of income. Individuals at higher levels of income, by taking advantage of the deduction, would increase its cost to the government, but not provide the intended benefit: reducing the number of future indigent retirees. Since individuals at these income levels overwhelming have funded retirements plans already, it makes no sense to offer an incentive, where none is needed. To do so, would waste money.
The tax code has two obligations to serve. One is to be "fair", that is, to spread the burden of tax equitably. The other is to minimize that burden, and that includes eliminating unnecessary costs. In fact, it is really in no one's financial interest to extend the IRA deduction to all income levels, since the excess cost is simply lost money, and money that would have to raised through taxes anyway. So, though it may not seem "fair" to phase out the deduction, the taxpayer who cannot deduct the contribution still gets a better overall deal than the two alternatives: with no incentive (and lots of homeless retirees on the streets) or everyone can deduct the contribution (and then he has to pay a higher marginal rate to make up the shortfall).
One can certainly argue the details of any tax incentive's implementation. But a well designed tax incentive saves everyone money. Merely looking at the microeconomic impact for fairness misses the big picture completely. To take an extreme example, which tax system would you prefer: a system in which I pay $90 in taxes and you pay $100 on the same income, or one in which we both pay $300? The latter system is certainly fairer on a dollar and cents basis, but the former is definitely better for the both of us. |
