Tax-free rollover into the IIA of the proceeds from the sale of a principal residence. IIAs, unlike IRAs, would not be limited to retirement saving. IRAs have been justified as an incentive for taxpayers to save for retirement. This is too narrow a focus. IRAs should be thought of as a very limited means of offsetting the current bias in the income tax against saving.
Income is taxed when earned.
The income tax thus raises the cost of saving compared to that of current consumption. A neutral tax code would not penalize saving relative to consumption. There are two ways to make the taxation of saving and consumption neutral. The bias in the income tax extends to all taxable saving, not just that for retirement. To create a neutral tax system, all saving, whether for retirement, buying a house, college tuition, a new car, or protection against a rainy day, should receive the same treatment as in a tax-deferred income plan.