Tax Reform

UPDATE: Congressional Republicans (and Maybe Donald Trump Too) Could Be Coming For Your 401(k)

Tax reform will change how Americans save for retirement, but lowering a tax deduction for 401(k) savings would be a fiscal and political misstep.

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CHRIS KLEPONIS/UPI/Newscom

House leaders say a bill will rewriting the federal tax code will be released tomorrow. One idea reportedly being considered for it could imperil a key incentive to save for retirement.

President Donald Trump and Republican leaders in Congress had promised not to mess with how 401(k) plans operate or to change the current tax deduction for contributions to those retirement accounts. Last week, however, the president suggested that he may be willing to ignore that promise. "Maybe we'll use it as negotiating," Trump said.

If nothing else, that demonstrates the difficulties Republicans have had in passing major legislation. Saying publicly that you might use something as a negotiating tactic is, in fact, not a great negotiating tactic.

And politics aside, rolling back 401(k) deductions is a bad idea on the merits.

Any comprehensive tax reform plan is going to have significant consequences—both intended and unintended—for how Americans save for retirement. The very existence of 401(k) retirement plans is, in fact, one of those unintended consequences. That section of the tax code was written in the 1970s as a special favor to high-earning executives who wanted to avoid taxes on the part of their income that they invested in the stock market. In 1980, Ted Benna, a retirement consultant working for The Johnson Companies, realized that any employee could use that same provision to make investments with pre-tax dollars, and the 401(k) retirement plan was born. Today more than 55 million American workers have 401(k) retirement plans containing over $5 trillion in savings, according to the U.S. Department of Labor.

Under current law, workers can contribute up to $18,000 a year to their retirement plans, tax-free. So if someone earning $100,000 a year, subject to a 28 percent federal marginal tax rate, contributes $10,000 annually to a 401(k) plan, she reduces her taxable income to $90,000 for the year. That level of income is taxed at 25 percent by the federal government, so the worker's tax liability (absent other deductions and credits) would drop from about $21,000 to around $18,000.*

According to data from the Congressional Joint Committee on Taxation, as reported by The New York Times, the 401(k) tax break cost the federal government more than $115 billion in revenue during the current fiscal year. As Congress mulls a $6 trillion federal tax cut, some legislators—includinRep. Kevin Brady (R-Texas), who chairs the key House Ways and Means Committee—have been eyeing 401(k) contributions as a way to "pay for" tax reform. Lowering the threshold for tax-free retirement contributions, potentially to as low as $2,400 a year, would allow Congress to offset tax cuts elsewhere.

[Update: ABC News, citing sources familiar with the tax bill, reports that the proposal would "lower what individuals may contribute tax-free to their 401(k)s, to an amount about halfway between the current limit and what House Republicans initially proposed."]

There is, of course, a better way to "pay for" tax cuts: Cut spending.

Lowering or eliminating the 401(k) deduction will likely make it harder for workers to save for retirement, something many Americans are already struggling to do. While 401(k) plans have hit record levels in recent years, the average account holds less than $100,000—an inadequate amount for an individual's retirement.

Unlike tax breaks that benefit only a small set of individuals or businesses—or even more broad-based tax breaks, like ones targeted for homeowners and children—the exemption for retirement savings helps just about everyone. Aging isn't a choice, and retirement is something that virtually everyone hopes to enjoy.

Rationally, people should be motivated to save for retirement whether they are getting a tax break to do so or not. Unfortunately, that's not necessarily how many people think.

"This is going to eliminate one of the major incentives that people have to save, which is to avoid paying taxes," says Daniel Rickett, president of Capital Street Financial Services. Rickett warns that lowering the 401(k) deduction threshold would have knock-on effects that Congress may not be expecting. Less money, for example, would be invested in the stock market.

Private retirement savings are essential, since government options such as Social Security are unlikely to cover most retirees' living expenses (and may not even exist at all by the time younger workers retire). Private-sector workers are trying to save for their own retirements while also funding the retirement accounts of public employees, who are owed more than $1.5 trillion in unfunded benefits over the next few decades. Congress isn't considering new taxes on public workers' retirement income, but instead is targeting private-sector employees who are already hampered when it comes to saving for retirement.

Lowering the threshold for pre-tax contributions to 401(k) plans is part of an overall Republican strategy to encourage more Americans to use Roth IRAs, which are funded with after-tax dollars and grow tax-free. Roth IRAs are often a good investment tool for retirement, but lowering or removing the 401(k) deduction essentially forces all Americans to use Roth accounts instead of other options that might be better in individual circumstances. Consider the hypothetical worker we discussed earlier: Instead of saving $10,000 and getting a $5,500 break on her tax bill, she would have to pay the full tax amount and then save part of what's left over in a Roth account.

Republicans also stand to lose politically by going after the 401(k) deduction. The tax bill has yet to be introduced, but Democrats have already pounced on the possible change. "Families today are already not saving enough for retirement, and we are concerned that mandating Roth savings will diminish their ability to save even further," wrote a group of five Democratic senators in a letter sent last week to Republican leaders negotiating the tax reform plan. "Those with limited discretionary income will need to reduce their current level of saving to afford the immediate taxes due on their savings, or they will need to reduce other necessary spending."

In other words: Because Republicans in Congress can't find the guts to cut their own spending, you'll have to do it instead.

*The original version of this article misstated the potential tax savings in this hypothetical scenario. Thanks to several readers who pointed out the error

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  1. House leaders say a bill will rewriting the federal tax code will be released tomorrow.

    Clearly they have the will.

    1. But will it triumph?

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  2. At this point a wealth tax is inevitable.

    1. You get less of what you tax. We need to tax poverty.

      1. And unemployment. We need tax penalties for people who fail to maintain employment.

  3. I don’t understand this. It’s not only not conservative. It’s not very Republican.

    1. Which part? The 401(k), or it’s repeal?

      1. The lowering of the 401k withholding limit.

        1. Didn’t Trump say this wasn’t going to happen? If they pass it he will have to veto it or go the way of Bush the 1st.

    2. Budget gimmicks aren’t just for Democrats.

    3. I don’t understand this. It’s not only not conservative. It’s not very Republican.

      It’s not conservative, true. Republicans have no firm stance on any issue whatsoever, so it is very much Republican.

      1. It’s simple. The corporate lobbyists have more power than the middle and upper-middle class salaried workers who depend on 401Ks.

    4. The weird part is that it actually is progressive (in the sense that we have a “progressive” tax code). The median contribution (as opposed to the average contribution) is actually pretty close to the discussed limit, so the impact of this change would disproportionately hit the wealthy. Poor and middle-class Americans would largely be left unaffected.

      To be clear: I’m not advocating for this change (I think it’s a horrible idea), but it wouldn’t actually hit as many Americans as all that retirement/tax-policy journalists have made it sound like. Admittedly, that’s mostly because Americans are shit at saving for retirement, with or without 401(k)s and other incentives, but the bottom line is that this would mostly impact upper-middle class and upper-class earners, who can most afford it.

      The real bottom-line is that if incentivizing retirement savings is a legitimate goal of government (and more retirement savings means less government spending on seniors in retirement, so for non-Libertarians this isn’t controversial), then 401(k)s are not a good vehicle, but currently they’re the best we have.

      1. How about eliminating the limit altogether, and eliminating taxes on your retirement plan earnings. That would encourage savings.

        1. Seeing as the vast majority of folks don’t hit the limit all-ready, removing it would only benefit the wealthy who already don’t need an incentive.

          Please note, this is entirely distinct from whether or not incentivizing retirement saving is a legitimate government function or not. Pretty sure that the “Libertarian” answer to the whole question is “abolish taxes and let me save or spend as I want”.

      2. Enh, I’m tired of the government claiming I’m “wealthy” because I live in an expensive city whose affordability is greatly exacerbated by government programs.

      3. This is a good analysis. However, I’d like to point out that the government collects its money either way. By deferring the tax on this income, they potentially stand to collect more money, but it would be in the future. This operates under the assumption that the tax rate will be higher in the future than it is today (which I consider a pretty safe assumption) and that individuals, on average, will do a better job of investing their 401k savings than the government. If you accept both of these assumptions, then by lowering the limit, the federal government is choosing to collect less money today rather than waiting and collecting more money when the individual retires.

  4. According to data from the Congressional Joint Committee on Taxation, as reported by The New York Times, the 401(k) tax break cost the federal government more than $115 billion in revenue during the current fiscal year.

    Why would you bother to scare quote “pay for” if you’re not going to scare quote “cost”?

    1. I love the mindset that my dad keeping more of his income because he’s able to invest in a 401(k) is costing the government anything.

      It wasn’t their money to begin with!

      1. It would not be costing the government even if you grant that premise. That money is loaned out to become involved in some mother activity which is taxed plus it will eventually be coming out of the 401K anyway at which time it would be taxed. Buy bonds or stocks lets the bond/stock sellers use that money for purposes of their own. I guarantee you they are taxed.

      2. The explanation for the use of “cost” is “as reported by The New York Times”.

      3. “It wasn’t their money to begin with!”

        That’s what you think! In fact, the government has first claim on all of your income. The 16th Amendment has no limitations.

        President Obama put it very well when he said, “You didn’t build that.” You get to keep what the government says you can keep.

  5. I thought that 401(k) plans were put in place to ease the transition away from social security.

    You know, a few decades of making everyone lock up a bunch of their money in a federally controlled savings vehicle would let the feds back off on Social security because ‘everyone has so much saved for retirement’. Disguised as ‘means testing’ of course, not outright honest repeal of a ponzi scheme.

    1. I remember politicians saying this in the 80’s.

    2. 401k and IRA plans were a smokescreen so employers could do away with pension plans (except for government employees of course). The average 401k balance is about 120K, which will last most people about 3 years in retirement.

      Unfortunately, Social Security is here to stay, with higher tax rates and higher income levels subject to the tax.

      1. It’s even worse then that, as the mean is significantly lower then the average. The high-wage earners who max out their 401(k) contributions really skew the averages.

        1. Try again.

      2. I see 401Ks as a supplement to SS, not a replacement.

  6. “This is going to eliminate one of the major incentives that people have to save, which is to avoid paying taxes,”

    I thought it only deferred paying taxes, not avoided paying.

    1. For many (most?) it’s deferring until you’re in a lower tax bracket, which is a partial tax avoidance.

      I really doubt this goes through. It’s just terrible politics for one, and the 401(k) is one of the greatest (and clearly most underappreciated) bits of public policy over the past century. How do you think American business is going to do when employees start clamoring for new pensions to make up the shortfall, or even further bumps in Soc. Sec? Dumb, dumb, dumb.

      1. My misunderstanding then. I thought the money was taxed when it was withdrawn.

        1. It is taxed when withdrawn. But it’s taxed at the rates in place in the year you withdraw. There’s a decent chance that will be lower when you’re in retirement. In addition, the deduction comes off the top so it saves you at your marginal rate. When you withdraw, it’s likely your only significant income source, so its gets spread over multiple brackets.

          1. So it’s a marginal tax avoidance then. That’s different.

            1. Yes, and deferral. It’s certainly a tax benefit, but probably not nearly as large as many people assume.

            2. Imagine you make $200k and pay 28% today.

              When you are retired you might only withdraw $50k per year if everything is paid off and you have savings outside your 401k. Your tax rate might be 10%.

              That is a big difference.

              1. That is a big difference.

                And still not avoidance.

                1. For the same reason, it also means it’s not much of a revenue generator for the government, either. People are going to be paying taxes on this money, just not NOW. It does very little to change tax revenue over the long haul, and selling it as such isn’t accurate.

                  1. @mortiscrum
                    “For the same reason, it also means it’s not much of a revenue generator for the government, either”
                    Well, sort of… it’s revenue now, rather then revenue in the future. So speaking from a status-quo context, it’s borrowing from tomorrow to pay something today.

                    Ultimately, it’s probably a wash or a loss even (as it’ll effect retirement savings in however many years), but in the short-term (meaning the next five-ten years) it’s probably a net increase, which means they can claim that their other tax reforms are “revenue neutral”. And that’s the objective: getting the scoring.

                2. You have to consider too that you can move the money between investments with no penalty as well.

                  But yeah, you still end up paying taxes. It will just be a lot less in taxes than you otherwise would have.

                3. Sure it is. I pay 9 percent in California income tax right now. If I put money in my 401k, I pay 0 percent. Then I move to a no income tax state when I retire and avoid the 9 percent.

                  Plus you compound your gains tax free for decades. Say you make 7 percent per year and compound that for 40 years. Compare that to making 5 percent per year after taxes and compounding that for 40 years.

                  Just hope the federal rates really are lower when you retire. They could go up.

                  1. Hint: 7 pct per year for 40 years is 15 times your principal back.
                    5 pct per year for 40 years is 7 times your principal back.

                  2. 7% a year? You use the California pension fund rates?
                    With a couple thousand minimum, you can get from 0.75% to 1.65% on a CD.
                    In the stock market you can (maybe) make more, but there are those pesky fees and expenses.
                    No one is getting 7% this year, and the fed is pretty much promising you won’t be near 7% in your lifetime.

                    1. 7% a year? You use the California pension fund rates?

                      CalPers does ‘socially responsible’ investing while also wearing rose colored vision correction devices thus they eschew investing in things that actually make money, so its no surprise they don’t meet their targets.

                      CD are essentially certificates of depreciation. Not as bad as cash, but still guaranteed to lose you money.

                4. It is avoidance, but not evasion.

          2. “There’s a decent chance that will be lower when you’re in retirement.”

            I’d be interested in seeing an analysis. I was under the impression that it was the other way around. Also factor in the fact that you’re withdrawing money AFTER compounding interest on your investments.

        2. For a traditional 401(k) it is, but usually at a lower rate since you’re probably going to be in a lower bracket.

          Also, if you compare to a regular brokerage account, you’re paying taxes one less time. In both cases you’re taxed when you withdraw (or simply sell in the case of a brokerage account) but with a normal brokerage account you have to use post-tax dollars to invest.

          1. So it’s tax deferral which isn’t tax avoidance.

            1. If the overall tax paid is lower you’re avoiding taxes to some extent.

              The Roth versions of 401(k)s and IRAs work by having a 0% tax on withdrawals or gains (that meet the requirements obviously) which is clearly superior to having to pay taxes on gains in addition to paying taxes on the money used to invest.

              1. If paying less taxes is avoidance then only increasing spending by 9 percent instead of 10 is a spending cut.

                1. Yes. Changing your tax tactics to reduce your tax bill is avoiding taxes. This isn’t difficult.

                  That said, if you were initially promised a raise of 3%, spend months planning your budget around that promised 3% raise, but then only get a 2% raise, then you’d probably call it a “cut” too.

                  1. Deferral isn’t avoidance. Paying less later is not paying none ever. Funny how so many people can’t grasp such a simple concept.

                    1. Methinks you are looking at taxation as a singularity. It is not. It is avoidance and deferral, at the same time.

                      Think about it.

                    2. Methinks you are looking at taxation as a singularity. It is not. It is avoidance and deferral, at the same time.

                      Think about it.

                      Nah.

                    3. Paying 5 dollars tomorrow instead of 10 dollars today isn’t avoidance? Okay.

                2. “Tax avoidance” is often used to describe legal maneuvering to lower a person or company’s tax bill and thus “avoid” some of the taxes. It’s not strictly used to describe never having to pay taxes ever.

                  1. They should get a better word then.

                    1. Seeing as language is the most democratic thing there is, and “they” grossly outnumber you… No.

                      You can either accept that the word’s contextual meaning is different from your linguistic preferences, or you can spit into the wind.

                    2. You can either accept that the word’s contextual meaning is different from your linguistic preferences, or you can spit into the wind. use the word correctly.

                      Better

                    3. Yeah… no.

                      If you want a language where words never change meaning, gain new meanings, or pick up context-specific meanings, then learn Latin. That doesn’t fly with any modern language.

                    4. then learn Latin.

                      I already did, thanks.

      2. It’s possible that tax-deferred savings will be ultimately be taxed at a far higher rate than if left in a taxable account.

        If a person is savvy or lucky, the returns on the 401k could result in an account worth millions at age 70. If the owner croaks before he takes withdrawals, his estate has to pay up to 40% estate taxes on the entire tax-deferred amount. When the tax-deferred account is distributed to his heirs, who are probably in their peak earning years, they will have to take distributions over five years and pay income taxes at their own marginal rates.

        With a $5.5 million exemption on estates, this situation does not affect many 401k owners. But there is another situation that may affect many more 401k owners.

        At age 70 you have to take required minimum distributions. In the early 70’s, the RMD is about 4% of the account balance. For an owner of a $2 million 401k, this would be about $80,000/yr. Add in $30,000 of social security, and they’re in the 28% tax bracket. Add in the increases in Medicare’s means-testing costs, and it’s probably closer to 30%. If that individual would have invested in equities outside of the 401k early in his career, he’d only have paid 15% on dividends and capital gains, so the deferral of investment income recognition actually cost him. Since it’s unlikely that a younger person would be in a bracket higher than 30%, even the contribution probably wasn’t advantageous.

        1. Owners of inherited IRAs do not have to withdraw the entire balance over five years. That’s one option. But another is to withdraw over your life expectancy.

  7. Hence the reason most people don’t trust anyone in politics anymore. the politicians are there to protect themselves and steal as much as they can from those they serve and tell us its good for everyone

    1. The reason I hate all of this is, every time these simpletons decide to muck with the tax code, I have to either hire an accountant to explain how this affects me or, I have to spend several weekends trying to figure it out myself. Either way, it is essentially an additional tax

      1. Or you can use any of several free online services, and take about 30 minutes tops after you hunt down the shoe box you use for tax records. I have never spent more than 20 minutes doing taxes since Al Gore invented the internet.

  8. So if someone earning $100,000 a year, subject to a 28 percent federal marginal tax rate, contributes $10,000 annually to a 401(k) plan, she reduces her taxable income to $90,000 for the year. That level of income is taxed at 25 percent by the federal government, so the worker’s tax liability (absent other deductions and credits) would drop from $28,000 to $22,500.

    That is not how the marginal rates work

    Assuming the 100k was the taxable amount and it was for a single filer and no other deductions or credits they would owe $20,982
    Contributing 10k to the 401k would reduce their tax owed to $18,239

    /pedant

    1. “Accounting is hard!” – Journalism major Barbie

    2. It isn’t pedantic. If the author misunderstands the basics of how tax brackets work, you can’t count on him to explain the impact of 401k changes.

      1. And if we can’t trust him on this can we even trust him at all?

      2. At least Boehm fixed it. Credit where it is due!

    3. My jaw dropped when I read that. I know most Americans are horribly ignorant and probably think that tax brackets work that way, but I’d expect more from someone getting paid to write about tax policy. That is not a minor detail.

  9. “That level of income is taxed at 25 percent by the federal government, so the worker’s tax liability (absent other deductions and credits) would drop from $28,000 to $22,500.”

    I don’t think you understand how marginal tax rates work.

    The tax bracket that starts at $91,901 pays $18,713.75 plus 28% of the excess over $91,900, so a 100,000 taxable income will pay $18,713.75 plus .28 * (100,000 – 91,900) = $20981.75. The 90k example would pay $5,226.25 plus 25% of the excess over $37,950 or $18238.75.

    https://taxfoundation.org/2017-tax-brackets/

    1. I think it’s great that people can nitpick details that have nothing to do with the thrust of the article. Honestly I think that’s why the writers do it.

      1. If you’re going to write an entire post about a tax policy, and give an example with numbers, you should know how one of the most basic elements of tax policy works and then apply it correctly in your example. If you don’t, you look like a no-nothing journalism major spouting off completely uninformed opinions.

        1. On the other hand, nitpicking an article about politicians changing taxation because there is an accounting error makes you look like a useless pedant. And it’s even worse when you type “no-nothing”.

          1. I need an editor too.

          2. He overstated the effect of the 401k tax benefit by 2 fold.

            That isn’t a nitpick. It fundamentally changes the argument.

            Perhaps it is actually no big deal to convert all 401ks to Roth 401ks. You can’t have an informed opinion if you don’t know the size of the effect.

            1. You know, there’s a reason I don’t take tax advice from journalists.

        2. Or a reason.com Republican posing as a libertarian. Along with most of the cocksucking posers.

      2. I don’t think this is nitpicking. He states the tax savings as $5,500, which on a $10,000 deduction would be a 55% effective tax savings rate. In actuality, in this example it should be a $2,500 savings if you assume a single individual with 1 personal exemption and using the standard deduction. Savings would be a less if you assume filing married, 2 personal exemptions and standard deduction ($1,830 by my calcuations)

        1. I’m certainly glad he’s not my accountant.

  10. This is what happens when you get hooked on welfare programs like the 401(k). Your life is thrown into chaos whenever the winds change in DC.

    1. Not taking is giving?

    2. Hugh’s retirement plan is the plot of the movie Spread, except everyone is 40 years older.

      1. “If this retirement village shuttle bus goes over 50 miles an hour, it will explode!”

  11. It’s hard to take an article on taxes seriously when the author doesn’t understand how marginal rates work. In the example given, if the author is correct that the 28 percent starts at 90k the lady saves $2,800. It doesn’t change her total tax burden from $28,000 to $25,000. Her tax burden at either income level is an aggregation of various amounts taxed at various marginal rates.

    1. Two other people already did it better than you.

    2. If he got one thing wrong, it’s reasonable to assume he got everything wrong.

      1. NO, he is not a Democrat, so that’s unpossible here at reason.com

  12. “Under current law, workers can contribute up to $18,000 a year to their retirement plans, tax-free. So if someone earning $100,000 a year, subject to a 28 percent federal marginal tax rate, contributes $10,000 annually to a 401(k) plan, she reduces her taxable income to $90,000 for the year. That level of income is taxed at 25 percent by the federal government, so the worker’s tax liability (absent other deductions and credits) would drop from $28,000 to $22,500.”

    You seem to have no idea how progressive tax brackets work. “Marginal” means that the rate applies to only to dollars above the threshold. The lower rates apply to dollars under the threshold.

    1. Three other people already did it better than you.

      1. But his editor did not.

        1. Hey, I’m with you. I don’t know if I can take an article about the government taxing previously untaxed money if it contains a minor accounting error.

      2. Sometimes folks hit “submit” on their own “first impression” comment before clicking “View Comments”.

        1. Shame.

  13. “This is going to eliminate one of the major incentives that people have to save, which is to avoid paying taxes.”

    “On the other hand, those taxes are going to bail out those people’s asses in retirement, so it’s a wash.”

  14. Alternately, we could advocate for a rollback on using the United States Tax Code to incentivize or disincentivize individual behavior.

    1. Tax excess body weight. It’s a win-win!

      1. Obviously I’m on board with that.

    2. We really can’t. The current scheme already has winners and losers, allocated according to political power and lobbying money. So assuming a revenue-neutral “rollback” for the moment, the current “winners” and “losers” would flip (even if that means they’re suddenly the same), which would be directly against the wishes and influence that got us here to start with.

      And the moment you start talking about a “rollback” that’s not revenue-neutral, then you’ve got even more stakeholders in play that will be fighting back.

      There’s a lot of reasons that tax reform is really damn difficult.

      1. Whoops, skipped your “advocate” word the first time through.

        So sure, advocate all you want. But it won’t work for the reasons I listed.

      2. You really need to give the majority of voters a tax cut, although some can get bigger cuts than others.
        The proposals I’ve seen don’t do that — many people are going to pay more, since they can’t itemize any more, and the rates for a lot of people aren’t even going down.

  15. Hey Boehmer, I’m not sure if anyone has pointed this out yet, but that’s not how marginal tax rates work.

  16. Could someone please give me a primer on how marginal tax rates work?

  17. Hey all, I’m not sure about this whole marginal tax bracket thing. Can someone help me out?

  18. Here’s a crazy idea: if you really want to help out savers save and even earn a little more money, try raising the interest rate to something a little closer to normal (above zero would be kind of nice). But doing that would require Paul Rino, Bitch McConnell, and the rest of the scumbags in congress to be a little more fiscally responsible, and I guess we can’t have that now, can we.

    As for the tax code, just scrap the whole damn thing and replace it with something simple and balanced that can fit on a page or two. The purpose of the tax system should be to pay for the government we supposedly think we need, not to artificially create endlessly competing groups of winners and losers locked in an eternal struggle to see who can steal a slightly bigger piece of the pie.

    1. How does a “simple” tax code work for businesses where you have to define “expense” before you can tax “income”?

      The obvious answer is that you don’t tax businesses you tax wages and dividends. But then I still have to define legitimate business expenses. Can my LLC own a car that I use without any taxable transfer?

      1. I suppose what I mean is that we already have a very simple tax code for people who simply earn wages and pay taxes. Yes there are some family deductions but compared to schedule C, they are pretty trivial.

        1. As an example, if every penny that lands in your hands is taxable, then when Grandma gives little Johnny a birthday card with $10 in it, Johnny must file a tax return and account for that $10, and Grandma may be required to file a correspond 1099MISC to document that she transferred monies to Johnny. Failure to do so on either party’s part obviously is tax evasion and a clear failure to comply with the tax code. If this situation is undesirable, then exclusions must be written and further, the definition of “gift” must be codified so as to avoid certain abuses that would inevitably occur.

          Now consider the nature of a gift exclusion that allows small amounts to be gifted without a need to report as income on the part of the recipient (or file a 1099MISC). First, how small is small? $10, $100, $1000, is that indexed to inflation? Can Grandma give $1000 *and* Grandpa give $1000 each? How often can a gift be given? Or is the limit a cumulative annual amount? If it’s $10, then lots of people will have to file 1099 and cause way more work than it’s worth. If it’s $1000, a lot of people will start black-marketing “gifts”: e.g. maybe I can convince my boss to “gift” me the maximum amount every year? Etc. Etc.

        2. If I loaned $750 to someone, who paid me back $1000 (i.e. repay $750 and pay $250 in interest), the $1000 check is not all income to me right? Income in this case would be $250, the interest paid, the other $750 is simply returning my money. What if I loaned my brother $5000, with a contract, interest payment and everything, then 5 years later decide that he doesn’t have to pay it back? Is that a gift? Have I violated the gifting rules? Is that loan income to him? Is it a loss for me? Can I use it to offset other income? Etc. Etc.

          What about a lottery winner, say $1000 on scratch off. Surely that’s all income? But current tax law says that if he spent $750 buying tickets, the net gambling income is only $250. It cost $750 to “earn” $250. What if he won $1000 but lost $10,000? Current tax law says too bad on $9000, but he owes no tax on the $1000 winnings. Current tax law looks at your gambling income as if you were playing a long poker game: win or lose hands during the game, doesn’t matter, what matters is what you have at the end of the game (tax year).

          If my house burns down and the insurance company writes me a check for $100,000 is that income? What if the insurance pays more than I paid for the house? But what if it pays less than the house is worth?

        3. More rules will be needed to clarify these situations too. That’s just defining “income”?and those are the easy examples.

          If anything is deductible, say charitable donations, then another mountain of pages are required to spell out exactly how the deduction works, valuations to be used, etc. It’s easy enough to track cash donations (but current tax code has a lot of rules on those too, e.g. my donation to my alma mater is 80% deductible if I buy season football tickets, but 100% if I don’t). What is my deduction for used stuff given to Goodwill? Fiar market value? How is that determined? What valuation should be used for the Monet painting someone inherited from their grandfather’s estate when they donate it to a museum?

          Think of the pages and pages of rules needed to just define these elements, and the record-keeping needed to comply.

          1. “Think of the pages and pages of rules needed to just define these elements, and the record-keeping needed to comply.”

            And they’re all there because every time they had a “simple” definition, someone found a way around it.

            This is why a “flat tax with no deductions or exemptions” doesn’t do much, if anything, to reduce the size of the tax code.

            A “flat tax” is barely simpler than the few marginal rates we have now. Especially considering tax software and even tax lookup tables (which build the marginal rates into a single, simple “if you have taxable income of X, then your tax is Y”).

      2. Allow me to shill for the land value tax then. Blah blah blah minimal dead weight loss. Blah blah blah already collected for the most part, so tax reform is as easy eliminating all other taxes. Blah blah blah Smith, Friedman and Hayek approved.

    2. The purpose of the tax system should be to pay for the government we supposedly think we need

      Novel idea: as part of the tax filing process you can allocate to which Federal departments your taxes are given and in what proportion. Congress sets the rates for the discretionary tax and tells the departments in what proportion the each one’s levy is spent.

      doing that would require Paul Rino, Bitch McConnell, and the rest of the scumbags in congress to be a little more fiscally responsible,

      I’m not sure how you can blame all this on the supposed RINO’s of the establishment – they’re throwing a bunch of ideas at Trump because he has provided fuck all in terms of leadership. Pretty hard to craft a strategy for an organization when they won’t give you their requirements. And its pretty hard to cut spending when the President has declared flat out that nobody’s ox is getting gored.

      1. I’m not sure how you can blame all this on the supposed RINO’s of the establishment
        I wouldn’t blame all of it on anyone, but Republicans have been claiming that they’re the “fiscally responsible” ones for decades. Paul Ryan in particular cultivated an image/reputation as a tax/budget “policy wonk”.

        You spend that much time creating the image and reputation that you’ve got this all figured out, if folks would just listen to you, and it’s not unfair to say “okay, we’re listening” and expect something reasonable.

        That said, feel free to discount criticism from Democrats. The real criticism that you should be paying attention to are from “independent” orgs and Republicans.

  19. And after they destroy the pretax advantage of the 401K, they’ll focus on destroying the tax-free advantage of the Roth.

    1. Yep, this is part of the reason I’ve never gone for a Roth — I’d much rather lock in the gains on the tax-free savings now than trust that my withdrawals in the future will be tax-free.

  20. I love that 5 (by my count) people jumped in the comments to explain Boehm’s statement of tax impact is incorrect. If only all the voting public was as well informed as the Reason commentariat.

    1. Then they wouldn’t have elected Trump or Obama or Bush or Clinton or Bush.

      1. Whats… Aleppo?

        1. To be fair, if the American electorate was more fully informed, and less willfully ignorant, on many issues, then our chosen politicians would probably be very different then they have been.

        2. I could forgive the lack of foreign policy/knowledge.

          But “Look, 73 percent of what Bernie says I agree with.”?

          He dug deeper by trying to explain that “And look, libertarians agree with socialism as long as it’s voluntary…”

          Really? How can you have voluntary socialism? You can choose to live on a commune, and I’m pretty sure libertarians would support your right to do that. But that’s not socialism. Socialism is force.

          And then he picked Bill Weld as his running mate. Supports a ban on semi-automatic firearms, notably the AR-15 and the “no fly no buy” concept. Depriving citizens of Constitutional rights without due process is not something I see as libertarian.

  21. They are proposing doing this to offset the “cost” of rationalizing corporate taxes to something that does not create perverse incentives to not repatriate foreign earnings or reorganize as foreign corporation. So the question is, are these revenue losses real or only on paper because the government’s revenue projections assumes that the perverse incentives in the corporate do not exist? Are they doing this because we cannot account for the suboptimal effects of inefficient tax policy in order to fix it?

  22. At its roots, the main purpose of 401Ks and RRSPs in Canada was to encourage North Americans to save their money in order to fund their retirements because they (aliens!) knew it was going to be a challenge for government to cover the costs given the demographics..

    The thinking was simple enough. The government would permit investors to save (and invest) their money in a tax free account thus deferring paying taxes on income when it was time to retire. At which point people would then convert their accounts into RRIFs (I don’t know what it’s called in the USA) whereby they would declare as income the withdrawal amounts. So if you have, say, 50k, and you take out 1k per month you have to declare the 1k as income while the rest remains tax sheltered until you sell it out.

    It was meant as a long-term process and not an entirely crazy concept. But a funny thing happened on the way to life. Government spending never came under control and more and more they find themselves squeezed for money.

    1. (cont’d)

      There is so much demonizing of the rich you can do, raiding of SME’s and other tactics they use to find fast cash. In Canada, the current Liberal government is spending at an alarming rate and can’t wait until Canadians cash out their tax shelters to cover government spending. This is why Finance Minister Morneau (among other conflict of interest) concerns) along with the PM are first hitting middle-class SME’s for the cash. It’s grotesque.

      I see the same problem unfolding in the USA. Rather than ‘fuck you cut spending’ it’s probably easier for them to raid 401Ks because ‘fuck you that’s why’.

      My point is if they need short-term access to cash then do away with long-term products already. It’s unfair to people who plan for their future only to be raided by the government. It’s a troubling development to say the least.

      To the extent I read and understand the issue.

      1. I fully expect that this trial balloon is the carrot, and whether or not it passes, we’ll get the rod a few years later which is basically the government stealing from everyone’s retirement money.

  23. I prefer a return to the pre-1913 savings plan:

    Save as much you want, with no tax on your income.
    With no tax on your interest or capital gains.
    With no contribution limits.
    With no mandatory withdrawal schedules.
    With no penalties on your principal withdrawals.

  24. “Maybe we’ll use it as negotiating.”

    Truly, the shart of the deal.

  25. “Maybe we’ll use it as negotiating,” Trump said.

    What sort of retard tells you when he’s bluffing?

    1. Do you even #MAGA bro?

  26. Maybe I’m dense or something, but isn’t the current 401k just a transfer of wealth from people to Wall St? Here you can have this money on a tax deferred basis if you put it into this short list of investment options, which are primarily composed of stocks, and managed funds by the people that probably lobbied for 401k in the first place.

    Isn’t the libertarian position to remove all of these tax incentives (ie crony capitalism), even the more “popular” ones? We should advocate for giving the people more of their money back AND the freedom to decide how to invest it and not give them a slice and force them to invest in stocks (and basically just make the mutual fund managers richer).

    1. Fair point.
      We should just radically increase the standard deduction and eliminate everything else. then let people decide what to do with their money.

    2. The libertarian position is to back the Republican platform, do whataboutism with Clinton/Obama, and encourage more crony-capitalism

      1. You’re conflating Republicanism with libertarianism, much like roughly half of the Reason commentariate.

        1. That’s because there are so many adherents to Republicanism insisting they are libertarian.

          1. There were many people here voicing support of Roy forking Moore. Libertarian extraordinaire for sure.

            1. And bad mouthing Senator Flake, who while certainly not perfect, isn’t that bad. He’s certainly more libertarian than Trump.

  27. My take:
    As someone who always maxes out their 401(k) contribution (thereby minimizing my tax burden), the effect of this would be to induce me to reduce my contribution and put the money into a Traditional or Roth IRA instead, or spend it (or maybe a 529 plan) There’s really no point in putting money into a any of these plans if it’s not going to be tax deductible though – there are other saving vehicles out there that aren’t constrained by the rules of 401(k) plans. People who are already maxing out their IRAs and 401(k) and 529 plans will just reduce their contributions and either save it in a personal brokerage account or spend it.

    Therefore, I suspect the goal of this is to get people to spend more by incentivizing people to reduce their 401(k) contributions, thus increasing their take-home pay. This would create an artificial GDP bump ahead of the midterm elections which would benefit Republicans in Congress.

    1. Clever argument. I don’t know if the politicians are smart enough for this to be the real reason.

    2. Absolutely true. It makes no sense to invest in 401k if it doesn’t go in as pre-tax, UNLESS your employer incentivizes you to do so through a match. Then it makes sense to do it only as much as the match will allow.

      The thing that people tend to forget is that your 401k is not really available to you for emergencies or other investment opportunities unless there’s a qualifying event, and even then you can be hit with a 10% fee. It’s a conservative investment in that way. But so is “saving” in general.

      1. Actually, most of the time a good deal of the 401k is readily available for emergencies, for those plans that allow “loans” from 401ks, which is the majority of 401k accounts.

        1. You get fucked if you don’t pay back the loan from the 401(k) on time though. You end up paying taxes on the money with something like an additional 10% penalty (can’t recall the exact number off hand). It’s just much more risky to borrow from a 401(k) than to get a traditional bank loan, and interest rates right now are so low, it’s not worth it. You would only want to borrow form your 401(k) in an absolute emergency.

        2. Well I mentioned “qualifying event” which is usually the requirement even for a loan. And even then, a lot of people only have access to a fraction of their own contributions, not their employer’s.

      2. Yeah, You would still want to get the match, but that’s it.
        There’s no point in putting in any money beyond the match or the tax deduction limit, whichever is higher.

    3. Absolutely true. It makes no sense to invest in 401k if it doesn’t go in as pre-tax, UNLESS your employer incentivizes you to do so through a match. Then it makes sense to do it only as much as the match will allow.

      The thing that people tend to forget is that your 401k is not really available to you for emergencies or other investment opportunities unless there’s a qualifying event, and even then you can be hit with a 10% fee. It’s a conservative investment in that way. But so is “saving” in general.

  28. If nothing else, that demonstrates the difficulties Republicans have had in passing major legislation.

    You’re the majority, you fucking retards.

    1. Only if you retain the fantasy that the republicans are still one party.
      I mean, they let Trump run as a republican, after all.

      1. The Republicans are still ONE party, you fuckwad.

        Headed by Drumpf. This is what they ALWAYS do. Cut taxes, borrow and spend like drunken sailors, wage a couple of wars, and then call it a day.

        When the Democrats clean their mess up they scream “deficits” and “debt”

        Did so with Reagan, Bush the Elder, Bush the Younger and now with Drumpf.

        1. When the Democrats clean their mess up…

          Hahahaha! This is one of the reasons I come to this site. The trolls and sockpuppets’ willful blindness to reality can still give me a laugh at times when I really need one. Your assessment of the GOP is spot on, but you just can’t acknowledge that the exact same behavior comes from your tribe as well.

          Let me guess, for your next trick you’re going to memory hole that part where I said Republicans are awful, and accuse me of being a Republican pretending to be libertarian. Because anyone who dares to criticize the obviously superior Blue Tribe can only be of the evil Red Tribe. Am I right?

  29. Of course, if the tax rate is lowered enough, you do not need a deduction in order to save – – – – – –
    Get rid of all deductions, have one tax rate starting at whatever income is just over the annual minimum wage, and cut the hell out of the federal budget to make that rate pretty low.
    FYTW to high state income tax states, keep the federal burden fair.

  30. Yes, making it less attractive for people to save, eliminate social security and you should be set for MAGA

  31. “Consider the hypothetical worker we discussed earlier: Instead of saving $10,000 and getting a $5,500 break on her tax bill, she would have to pay the full tax amount and then save part of what’s left over in a Roth account.”

    Um, isn’t 25% of $10,000 $2500? Who’s paying $5500 on $10000 of income?

  32. If they did real tax reform (1987 style) they would reduce rates drastically, and reduce deductions drastically at the same time. Lower rates would mean the loss of the deductions wouldn’t matter so much.

  33. The other danger, which could happen in the future, is that congress could tax traditional IRA withdrawals of retirees. Just because they were said to be tax free on retirement at the time of making deposits, does not mean that will necessarily always be honored.

  34. Actually the tax consequences of the 401k reduction would be FAR WORSE than this article indicates.

    Consider a married couple, both age 60, with joint total income of $84,000/yr. They can contribute $24,000/yr to 401k, which is an adjustment to total income. They also pay $15,000/yr in ObamaCare premiums, but they are eligible for an ObamaCare tax credit of about $9,000/yr (the exact amount requires a taxpayer to perform an iterative algorithm.) The $6,000/yr difference is also an adjustment to total income.

    So, their AGI is $60,000. This is less than 400% of poverty line, so they qualify for the ObamaCare tax credit.

    Standard deduction is $12,700; exemptions are $4050 each; so taxable income is about $39,200. Total income tax is about $5000. However, due to the $9000/yr ObamaCare tax credit, they will actually get a check for about $4000.

    Reduce the 401k deduction, and the situation is hugely different. Total income is still $84,000/yr, but they don’t qualify for the ObamaCare tax credit. They adjust, say, $3000 for the max 401(k) and $15,000 for health insurance premiums. Now AGI is $66,000, which is over 400% of poverty line.

    Same deductions and exemptions, so taxable income is about $45,200. Total income tax is about $5800. However, they don’t get an ObamaCare tax credit, so they have to write a check.

    In other words: The reduction in the max 401k deduction increases the income tax liability by nearly $10,000/yr for this couple.

  35. If the goal is ensuring adequate retirement, wouldn’t some kind of Basic Income scheme be simpler? Then we could dispense with social security, tax advantaged savings, unemployment insurance, and so forth.

    1. An assumption of a UBI is that it provides sufficient income to survive on, so let’s use the poverty line as the basis for the UBI. That is, a single person household would receive a UBI of $12,060; A two-person household would receive a UBI of $16,240; and so on. Note that even this basic assumption leads to perverse outcomes (e.g. two adults living separately would get $12,060 each, but if they live together they “lose” $7,880 in UBI), so at least some will avoid getting married, or even living together (or lie about living together, thereby defrauding the system) just to maximize their free money.

      Using census data, there are 124.5 million households. The average household size is 2.54 people. Let’s interpolate the poverty table to get an average expected UBI of about $18,497. Multiplying that out we can get the tab for providing UBI based on these assumptions, a total of about $2.303 trillion.

      Coincidentally, that is almost exactly the amount of money we currently spend on all social welfare benefits programs, including Social Security, Medicare, Medicaid, foodstamps, etc. A reasonable idea–indeed, this was put forward in a WSJ essay by Charles Murray–would be to eliminate all those programs in favor of the UBI. Of course, this ignores the howls that would arise from a populace deprived of their SS checks and foodstamps.

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