Don’t Tax You, Don’t Tax Me…Tax that Guy Behind the Tree!

May 6th, 2013 at 9:10 am

Everyone says they want to broaden the tax base and lower the rates.  Until you get specific…then it’s “that’s no loophole, that’s my vitally important jobs, investment, savings, and growth, program!”

That’s certainly the way to understand the pushback to the President’s very good and very modest idea to limit the amount of tax deferred savings you can accumulate in your IRA or 401(k) plan.  The proposed cap is set at $3.4 million, which was set to produce an annuity of about $200,000 per year, an amount chosen because it’s the limit allowed under traditional defined benefit pensions (it would be adjusted for inflation).  The cap raises about $9 billion in new revenue over 10 years.

I’ve been struck, though not surprised, by the attacks on this idea as punishing savers.  Kudlow and Laffer—two guys who are very much in the “broader base, lower rate” camp—hate it (we debated it the other night) and at the Milken Panel on tax reform, when I defended the idea, the moderator asked “how many in the audience think this is a good idea” and not one hand went up.

Look, there’s nothing wrong and a lot right with incentivizing retirement savings but opponents of this cap have to answer the question, “at what point does a tax incentive become a tax shelter?”

How about, for example, when the share of IRAs or 401(k)’s with accumulations above that cap are tiny fractions: “…about 0.06 percent of IRA account holders have more than $3 million in their accounts, as do about 0.0041 percent — that’s one in 25,000 — of 401(k) account holders” according to an excellent piece on the issue by Fred Hiatt in this AM’s WaPo?  Remember Romney’s $100 million IRA?  That’s another answer to the question of when incentive morphs into shelter.

Hiatt makes another important point here:

[The proposal] isn’t keeping people from saving as much money as they can or want. The question is how much the rest of us should have to chip in. Obama is suggesting that at some point retirement accounts, invented to encourage working people to set aside enough for their sunset years, no longer need a helping hand from taxpayers.

[BTW, note how Hiatt, an editorial page editor, in this otherwise fine piece is compelled to take a swipe at Obama’s “leadership,” a total non-sequitur but apparently a box that these guys must check in every commentary.]

One criterion by which to decide which tax expenditures should be ended is efficiency: does the subsidy incentivize some economic activity that would occur anyway, without the tax break?  I’m supremely confident that foregoing tax revenues to incent retirement savings by the richest 0.0041% is a waste of money.  They would sock away ample savings without the break.

If we can’t agree on that—if the lobbyists shut this one down—then maybe we should just stop kidding ourselves that tax reform is something we actually want to accomplish.

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4 comments in reply to "Don’t Tax You, Don’t Tax Me…Tax that Guy Behind the Tree!"

  1. Dan says:

    Don’t bury the lede! James Kwak over at The Baseline Scenario talks about the fact that, actually, the evidence indicates that the retirement tax break does not actually increase retirement savings. See:

    Instead, as you suggest, at some point it simply becomes a tax shelter.

  2. tyler says:

    I am unsurprised by the attacks on this idea by Kudlow and Laffer—two very rich Republicans—because they’re probably thinking about their own IRAs.

  3. Job Creator says:

    “excellent piece on the issue by Fred Hiatt”

    Not a phrase I thought I’d be seeing.

  4. Jon Sanders says:

    It’s a beginning. Note that every tax-the-rich scheme eventually hits people who had no idea they were rich.