What's Wrong With the Homemaker IRA.

Signing the minimum-wage-hike bill last month, President Clinton hailed its passage as a big victory for the working poor and the Democratic Party. But buried in a tax package attached to the wage law--and completely missing from most news coverage--was a small triumph for Texas Republican Sen. Kay Bailey Hutchison. Her sweetener, the so-called Homemaker IRA, would increase the sum that homemakers are allowed to put away in tax-free Individual Retirement Accounts from the current $250 to $2,000 a year, raising their IRA savings limit to match that of their working spouses.

Hutchison originally sponsored the bill in 1993; by 1996, over half the Senate had leapt onto the bandwagon. Endorsements included every group from the Christian Coalition (it promotes family values) to feminist groups (women would be the prime beneficiaries). Bob Dole is still endorsing its enactment--even though the plan is now law. (Dole included Hutchison's proposal in the economic package he introduced after the minimum-wage bill had sailed through Congress on its way to a sure presidential signature.)

With so broad a constituency behind it, why would anyone oppose the provision? Because IRAs cost the Treasury money--which must ultimately be made up either by raising other people's taxes or cutting their benefits. According to an estimate by the Joint Committee on Taxation, the IRA expansion would cost $267 million in lost revenue over a five-year period, which makes the merits of the case worth a closer look.

Supporters of the Homemaker IRA argue that the new benefit is needed because the current tax code discriminates against single-earner households. Families with two incomes can put away $2,000 for each spouse, while one-income households can save only $2,000 for working spouses and $250 for homemakers. It's "another marriage penalty," Hutchison contends.

By the "marriage penalty," Hutchison means the quirk in the tax code that pushes married people into higher tax brackets than their unmarried counterparts. That penalty, however, is paid only when both spouses work. When only one spouse works, married people are charged at a lower rate than the working spouse would be if he or she were single. The benefit of the Homemaker IRA will go to those who already enjoy this marriage bonus; those who bear the marriage penalty won't be affected.

And that tax bonus is not the only perk of Partridge Familydom. Almost every tax law pertaining to marriage gives single-income families more bang for their buck than any other category of taxpayer. Social Security and Medicare are prime examples. Employees and employers are each required to pay 7.65 percent of an employee's income in Social Security taxes and 1.45 percent in Medicare taxes. (The self-employed must contribute 15.3 percent in Social Security taxes and 2.9 percent in Medicare taxes.) Social Security benefits are based on individuals' earnings during their careers.

Single people and two-income families pay in when they are young and cash out when they retire. However, nonworking spouses (who never paid Social Security taxes because they didn't have an income to be taxed) are entitled to Social Security benefits and Medicare based on the contribution of their spouses. Retired workers collect Social Security benefits, and their nonsalaried spouses receive half. (Working spouses must choose between their own earned benefit or half of their spouse's.) After primary beneficiaries' deaths, their spouses collect 100 percent of the benefit earned by the deceased. The spouse also continues to collect the full Medicare benefit. So single-income families collect 1½ times the Social Security benefit and twice the Medicare entitlement a single person with the same income receives.

Health care is another part of the homemaker bonus package. Most public and private employers that offer health-care benefits to employees provide coverage to the spouses and dependents of workers without a commensurate increase in employee contributions. As a result, single-income families (and families with children) typically get coverage for more people than do single people and partners in dual-income households.

Supporters of the Homemaker IRA also make a feminist/fairness argument. Homemakers don't get the IRA, they argue, because their contributions to the family and the economy aren't counted as income. As Hutchison and Sen. Barbara Mikulski, D-Md., wrote in a WashingtonTimes op-ed, "Failure to address the IRA fairness issue tells homemakers: If your hard work doesn't produce taxable revenue, it doesn't count." Because the overwhelming majority of homemakers are women, Gloria Steinem and other feminists have long argued that their work should be counted as part of national production.

But the basic premise of the IRA rules is that people with income are taxed on their earnings. IRA accounts allow income-earners to duck some taxation on that income if they promise to save it until they're old. (Interest on IRA savings is not taxed until an individual withdraws it. Furthermore, money put in IRA accounts is tax deductible when family income is less than $40,000.)