Paygo is a good idea – until it's a really dumb idea. OK. So what's Paygo?

Paygo is a perfectly sensible idea – it’s Congressionalese for "Pay as you go." And it means that if Congress is going to cut taxes or create a new expenditure they have to pay for the revenue loss by raising taxes somewhere else or cutting an expense somewhere that makes the whole transaction revenue neutral. Makes sense, right?

Well, yes, until it doesn't. Case in point. One of the ways being considered to pay for a change in the Alternative Minimum Tax (a good idea) is to penalize long-term savings by removing the tax incentives of permanent life insurance and annuities (bad idea). Both products make huge annual contributions to the long-term savings of Americans. And it is a major incentive for people to put their money into these products because of their tax-deferred or even tax-free nature.

Specifically, the accumulating interest and dividends on the cash values of permanent life insurance and annuities are not taxed until surrender and then only if there is a gain. In the case of annuities that taxable gain can be spread over a person's lifetime if desired. Obviously, this is a huge incentive for people to put their money into such products to provide not only for their family's financial security for a lifetime, but also to accumulate money that will help soften the retirement-income blow.

Do people actually do this? Yes, they do. Americans annually place more than $400 billion into permanent life insurance and annuity products. Total assets held by America's life insurance companies exceed $4 trillion. And these assets are invested in our economy – housing, factories, hospitals, roads, bridges, schools etc. These are all long-term investments, the kind that banks can't make because of the short-term nature of their deposits.

Any tax plan that discourages the purchase of permanent insurance and annuities hurts the American people in a number of ways:

1) It discourages people from long-term savings programs.

2) It takes long-term investment capital out of our economy.

3) It discourages people from buying the kind of life insurance they will need and want in their retirement years.

4) It puts more pressure on government to provide financial security to people when they die and when they retire.

In short, taxing life insurance and annuity cash values robs Peter. But who gets paid? In the end, robbing Peter doesn't pay anyone. It only robs Peter even more. So while I believe in Paygo as a concept, let's be sure Congress knows what the "go" is when they find the "pay."