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Here’s How a President Really Pushes Tax Reform
By all accounts, passing tax reform/cuts is the top Republican legislative priority right now. But even though GOPers almost unanimously agree that something needs to be done about the labyrinthine, anti-growth, anti-investment tax code, hashing out the details of that “something” is complicated. For instance: Politico yesterday ran a piece that ostensibly showed the Trump administration-GOP congress “Big Six” negotiators making progress on a bill. From the story:
There is broad consensus, according to five sources familiar with the behind-the-scenes talks, on some of the best ways to pay for cutting both the individual and corporate tax rates. The options include capping the mortgage interest deduction for homeowners; scrapping people’s ability to deduct state and local taxes; and eliminating businesses’ ability to deduct interest, while also phasing in so-called full expensing for small businesses that allows them to immediately deduct investments like new equipment or facilities. . . . One idea quietly being discussed would be taxing the money that workers place into their 401(k) savings plans up front: an idea that would raise billions of dollars in the short-term and is pulled from the Camp plan. This policy idea is widely disliked by budget hawks, who consider it a gimmick; the financial services industry that handles retirement savings; and nonprofits that try to encourage Americans to save.
What I take from this is that Republicans still have lots of tough, important decisions to make. And some of them will be politically unpopular, to say the least.
So in an ideal world, the Republican president would be using the bully pulpit, including Twitter, to push hard the tax issue. Now for fun, I made a word cloud of President Trump’s speech last night (via WordItOut):
Now compare that cloud to this one created using President Reagan’s 1985 address to the nation the need for tax reform:
If Republicans want to pass tax reform, they need a) an actual sensible bill and b) a president who talks about it like Reagan did.
Published in Domestic Policy, Economics
One People, All Great.
Yes, let’s use the tax system to create further disincentives for people to save for retirement.
The first rule of Tax Club, the more you tax something, the less you get.
I’m guessing that this would mean all retirement plan saving would be Roth style, not the end of retirement plan saving entirely.
Hard to believe a political rally and a speech about tax reform could differ so much in their focus on tax reform… Data journalism at its finest.
Taxes should be cut, made simpler, broader and removed, to the extent they dare, from capital, investment, work and savings and if we must raise more revenue, raise it from consumption. However, tax reform does not have to pay for itself. Venice at its height of power and wealth, did not tax. They financed their limited government entirely with debt. There are two problems with debt, 1. we do not save enough to pay for it so we borrow other countries savings. 2. We spend too much unproductively, indeed much of our spending is directly harmful to growth, prosperity and basic flourishing. Just reform the damn tax code. Cutting spending is very important but a separate issue.
Cui bono?
A 401K Roth is not without merit. You get the same “free” money by matching the company’s contribution. You also shelter all future withdraws from both Fed and State income taxes. And there are no Required Minimum Distributions (RMD) for a Roth, making it an ideal “mad money” account for big purchases.
Assuming the same marginal Fed tax rate (25% for most earners) while working and at retirement, there is no net difference between pre tax and an after tax (Roth) account. But you can ignore State income tax (typically ~5%) with a Roth. And if you don’t need the money, it goes to heirs tax free. The heirs need to do RMD’s but it is not taxed.
Originally, IRA’s were sold to us Boomers that our tax rate would be lower in retirement than when we were working. However, since (any) Social Security income is usually 85% taxable, and with other pension income and the RMD’s required after 70.5, that isn’t always the case. You need cash to pay the withdrawals.* Your heirs also pay taxes on their RMD withdraws.
In retrospect, a Roth 401K would have worked well in my case, but I admit that the tax break when you’re young is hard to pass up.
* For a $100K withdrawal at 25% marginal, the Fed tax is $25K. You paid 25K on 75K “income,” or 33.33% rate, not counting any State income tax.
It appears James from you post that most of the “tax reform” ideas discussed were just ways to allegedly raise more money through effectively raising tax rates. Tell me why I am not surprised from the ‘work’ of the McConnell/Ryan clown and crime syndicate.
Almost all of these reforms will just hobble the economy more. Don’t you idiots know that at the high rates we are now, raising rates does not raise revenue. Quite the reverse.
Within a highly progressive tax rate structure economy, increases in tax revenue come from increases in economic growth and not from even higher tax rates. This has been proven over and over again.
Perhaps removing the multitude of barriers to economic growth due to regulations and banking restrictions would be a good place to start to get the economy going again, raising more tax revenue and reducing the budget deficit.
John, your correct on this and the government changing the rules. If they have a “means test” for the Roth’s only, they would have to do something similar for a pre-tax IRA, or try to explain why not, since they are technically equivalent at the same marginal rate. The mostly likely scenario proposed by Pelosi et al is a direct tax (i.e., confiscation) on both the Regular or Roth balances.
For me, I worked about 15 years without any 401K plans until the late 80’s, and then matched and soon thereafter invested the maximum permissible. I also invested the maximum after tax IRA ($2,000) for 10 years, but due to rollover IRA’s and market growth, I doubt I’ll ever get my original tax free portion ($20,000) on IRS Form 8606 until I die. I’ve been investing in Roth’s after they became available, and with Taxable IRA to Roth transfers, it forms a decent nest egg, ready for the Federal/State omelet.
The fact that a pretax deposit appears so valuable means rates are too high. The government can wipe out those advantages by just raising rates, even slowly and moderately over time which a progressive tax does when our nominal income grows through time. And of course they make you use it so you can’t just leave it as part of your estate so it’s not really yours. If the rate were lower, flat, simple and fixed in blood, and if all people paid it instead of payroll taxes where relevant and owned the resulting savings it would be a fantastic program that would stimulate savings and investment and get rid of SS. In the absence of this it’s mostly illusion.
Gehenna will freeze over before IRA inputs are taxable, regardless of the selling points. Sure, save now, get hit by a bus when you are 55. Wonderful. Publicize a “retirement savings crisis” and then tax savings, then increase SS and state-run defined benefit plans to cover the new induced shortfall.
The best immediate tax change that ought to be made- yesterday- is to eliminate the mortgage deduction on second homes, and in addition, the special break for people buying first residences in the Washington DC area. As you well know, that tax break benefits one group- Congress and a big chink of the beltway bandits.
I actually think retirement savers would generally benefit from having greater access to Roths. Eliminating the optionality between the two is obviously disadvantageous to some, but if you were only going to keep one type of tax advantaged account, it would be the Roth.
I disagree. I can take today’s tax advantage to the bank. I can’t depend on the beneficence of future Congressmen.