Democrats and 401(k) Plans: Tax, Baby, Tax?

[USNews & World Report]

Democrats and 401(k) Plans: Tax, Baby, Tax?
October 31, 2008 10:45 AM ET | James Pethokoukis

"You know, writing about this is dangerous in the current political climate," is what a Democratic congressional aide just said to me concerning my blog posts about how liberal Democrats seem to want to disappear the Investor Class. By "dangerous," I assume he means it doesn't play well with voters. (Indeed, John McCain has picked up on this theme in his stump speech.) If you are tuning in late, let me recap the reasoning behind the accelerating movement to tax retirement plans:

1) Investors tend to be for things liberals don't like, such as big tax cuts, smaller government, and Republicans. This is the political rationale behind Republicans pushing for an Ownership Society. It's kind of like how government workers tend to prefer bigger government and Democrats.

2) If the tax preferences for 401(k) plans and other retirement vehicles were removed and a "guaranteed" government retirement plan created—right smack in the middle of a brutal bear market—investors might well opt for the supposed safety of the government plan. On top of that, the aftertax returns for stock investors would be reduced by the higher capital gains taxes Barack Obama and congressional Democrats are promising.

3) This whole deal is similar to what Dems want to do with healthcare— create an alternative government insurance system that fatally weakens its private sector competitors so that in the end Uncle Sam is the last insurer standing.

4) Wouldn't all this hurt the stock market and the ability of private enterprise to raise capital? You bet, but proponents will try to replace any missing private capital with government "investment" spending.

http://www.usnews.com/blogs/capital-commerce/2008/10/31/democrats-and-401k-plans-tax-baby-tax.html

[Fox Business]

Beware of Congress’s Threat to Tax 401Ks
By Elizabeth MacDonald

With the bear market red in the claw, with an equal opportunity bear market taking out solid stocks right and left, with panicked investors feeling like every headline is an explosion, comes this impenetrable stupidity:

Some Democrats in Congress have held hearings that included discussions of new proposals to tax 401K money. Specifically, the idea would be to eliminate most of the $80 bn in annual tax breaks that 401(k) investors receive. Which means a nearly $80 bn tax hike.

Heavy Retirement Losses

The idea to tax 401K funds comes at a time when the Social Security trust fund is deep in the red and investors have lost nearly half of their retirement savings–$2 tn–over the past 15 months, according to the Congressional Budget Office. Retirement accounts known as 401Ks had held nearly $5 tn in savings at the start of the year.

Democrats are expected to gain seats in both the House and the Senate in the coming election. A filibuster-proof 60-seat majority is a strong possibility in the Senate, which has historically been less receptive than the House to taxing retiree funds.

In early 1968 President Lyndon Johnson made a change in the budget presentation by including Social Security and all other trust funds in a “unified budget,” which effectively let government use Social Security funds for its overall budget needs.

Gut-clenching Volatility

The Democrats’ move comes as investor fear is rampant, as investors have been experiencing increasing acid reflux ever since the subprime crisis went viral in August 2007.

Wall Street is witnessing gigantic swings never before seen in the history of the stock market, with the S&P 500 Options Volatility Index (the VIX) repeatedly breaking through the unheard of 80 barrier, twice the 40 levels that were unthinkable even when oil hit $147 a barrel this past summer-making a VIX 50 the new VIX 40.

Congress’s Support of Taxing 401Ks

House Democrats several weeks ago invited Teresa Ghilarducci, a professor at the New School of Social Research in New York City, to testify before Congress on her plan to eliminate the preferential tax treatment of 401K plans.

Specifically, Ghilarducci testified before the House Education and Labor Committee, chaired by Rep. George Miller, (D-Calif.), about her plan.

“We’ve invested $80 bn into subsidizing this activity,” Miller reportedly said in testimony, referring to tax breaks allowed for 401K contributions and savings.

With savings rates going down, “what do we have to start to think about in Congress of whether or not we want to continue and invest that $80 bn for a policy that is not generating what we … say it should?” Miller reportedly said.

House Education and Labor committee spokesman Aaron Albright emailed to say that the notion that Rep. Miller wants to tax 401K money is “absolutely ridiculous,” adding “chairman Miller wants to preserve and strengthen 401K plans, not tax them.”

Albright noted that the committee has called 11 witnesses, including retirement experts and advisors, over the last couple of weeks to assess the impact of the market’s downturn on 401Ks. He added that the committee is looking at disclosure of fees that eat into savings, as well as other measures to strengthen 401Ks.

Rep. Jim McDermott, (D-Wash.), chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support, has reportedly said that since “the savings rate isn’t going up for the investment of $80 bn [in 401K tax breaks], we have to start to think about whether or not we want to continue to invest that $80 bn for a policy that’s not generating what we now say it should.”

The idea being that, despite their tax-deferred status, 401K funds are not doing much to add to the nation’s savings rate.

Government Data Flawed

However, the government’s measure of the US savings rate does not include stock market gains or real estate gains, which of course have been smacked hard during the credit crisis and economic downturn. And that means the government does not count in its official savings rate the $5 tn that was invested in 401K accounts at the start of the year.

The Expert’s Tax Plan

The idea is to redirect 401K tax breaks to a new government system of guaranteed retirement accounts into which all US workers would be have to contribute.

Specifically, under Ghilarducci’s plan, the tax breaks on 401K contributions and earnings would be eliminated.

Instead, all workers would get a $600 annual inflation-adjusted subsidy from the U.S. government. The sum would be inflation-indexed. Workers then would be forced to invest 5% of their pay in a guaranteed retirement account administered by the Social Security Administration.

That money in turn would then be invested in government bonds that would pay a teensy 3% a year, adjusted for inflation, less than half the inflation-adjusted 7% return the stock market has delivered.

“I want to stop the federal subsidy of 401Ks,” Ghilarducci has said, adding, “401Ks can continue to exist, but they won’t have the benefit of the subsidy of the tax break.”

Tax Cuts Set to Expire

The idea to tax 401K accounts comes as a potential Obama Administration would let the Bush income tax cuts expire across the board.

That means even small businesses earning less than $250,000 a year would also see their taxes go up. The capital gains and dividend tax rates would also rise as well. Obama might also impose Social Security taxes on a higher level of wages and self-employment income.

Lower Taxes Help the Deficit?

As the US applies the paddles to the economy with record bailouts, a member of Congress during a recent hearing posed the question to Federal Reserve Chairman Ben Bernanke whether raising taxes during a downturn as a good idea. Bernanke’s answer: No.

And experts say lower taxes actually help the deficit. Between 2004 and 2007, when the Bush tax cuts were in full flower, the budget deficit narrowed from $413 bn to $162 bn in large part thanks to rapid growth in tax revenue, the Economist Magazine notes.

This was caused not just by rising incomes, but also by a shift in the distribution of incomes to the wealthy, who pay the highest tax rates, the magazine says. Much of that wealth came from the credit boom which drove up financial profits, salaries and bonuses as well as property and stock values and related capital gains, it adds.

The US has added the equivalent of the gross domestic product of Great Britain and something like two Canadas and five Saudi Arabias since 2003. Between year-end 2002 and year-end 2007 U.S. growth exceeded the entire size of China’s economy, Steve Forbes has noted.

However, Congress has virtually spent the amount in its bid to build a Supersize Me Government, spending that now sits squarely on the backs of taxpayers and entrepreneurs and which does not include the trillions of dollars in extra spending for the housing bailout and the bailout of Wall Street.

All proof positive that Congress has no more sense than a flock of geese.

http://emac.blogs.foxbusiness.com/2008/10/31/beware-of-congresss-threat-to-tax-401ks/

[Guest]

[Guest]

You must be one of the following:

"McCain, meanwhile, has the advantage among evangelicals (78 percent to 19 percent), those 65 years old and older (53 to 40), white men (54 to 42) and white women (48 to 47)."

Source:

NBC/WSJ poll: Obama holds significant lead

Dem's edge nationally over McCain stands at 8 points among likely voters

http://www.msnbc.msn.com/id/27488250/

[Guest]

I am for smaller government, not a larger one. Having the US government in total control of our earnings and health is dangerous. We need to have a happy medium.

[Guest]

The government is continuously looking for ways to make it harder for those of us who want to be self-reliant to do so. Whether you are for McCain or Obama, the fact is that many people are saving for retirement via 401K plans, myself included, and the closer you are to retirement, the harder it is to react to these types of changes. To blindly buy into this plan if you are for Obama is ridiculous. As more and more people rely on the government for more and more programs and subsidies (ie welfare), it makes it harder for those of us who want to take care of ourselves. Remember that the larger the government is, the smaller the private sector becomes and the load to pay for the government will eventually become too heavy for the private sector to bear.

[Guest]

[Guest]

This is no surprise.

NJ is controlled by the Democrats, yet we're all complaining about taxes, COAH, etc... So now we want to do this on a federal level?

- We have the highest property taxes because of our gifting to the inner cities whether through schools or other programs. Because of NJ aid Trenton was able to launch 0% interest loans to people wanting to fix up and remodel their homes. Substitute property taxes for income taxes and you have the same situation.

- The federal government allows Healthcare contributions to be made tax free, NJ taxes you on them. Anyway to find a tax dollar.

- NJ claims we need employers to offer better healthcare and have to do something. Well, how about stop taxing us and allow us to make medical contributions tax free. Encourage don't discourage health care.

- NJ has the 49th worst state to do business. Now, all 50 states will be bad because Corzine is advising Obama on what to do. Instead of moving jobs to PA or DE, they'll go outside the borders.

- Great idea forcing 5% of savings for people. What about the person making 50,000 today barely able to survive, doesn't want government help, is putting away 5% tax free to a company matched 401K. That 5% is less than 5% of pay because it's tax free. Now the government is saying you have to pay more money to save plus there will be no match. A company that matches dollar for dollar gives that individual a 100% return, better than 3% and even a 25% match is better than 3%. Not to mention 3% is rather low rate so the government is gaining further revenue through investment income. Rather, why not mandate Governement bonds or the like be part of 401K offerings and then guarantee 3%?

- Now, we're paying 5% plus 6.7% Soc. Sec. In total 11.7% will be paid to the government. Plus, the people will not be able to retire because 5% of pay, plus 3% of earnings, plus the minimal Soc. Sec. wage won't be enough to pay the NJ property taxes. So they will continue to work and contribute.

[Guest]

I am skeptical of any blog or commentary that makes sweeping statements like:

“Investors tend to be for things liberals don't like, such as big tax cuts, smaller government, and Republicans. This is the political rationale behind Republicans pushing for an Ownership Society.”

Besides being factually incorrect (the stats don’t bear out that investors or the wealthy are mostly Republican), it doesn’t speak to me as a voter or citizen.

I am a white male, Christian, making well over $250K/year. I invest, I hate our tax system (not the idea of taxes but the unfair way is distributes the burden) and I definitely believe in small government (the Federal budget should be about 10% its current size). Moreover I hate Unions for the most part (they served a noble purpose in the early part of the century but have been corrupted to the point where their early founders would be ashamed), I believe in a very limited version of welfare at best (the idea that companies pay into a system to help the people that contributed to it while working during a limited transition is fine – indefinite subsidy of families who aren’t even working for the benefit is not) and I believe in personal responsibility / ownership. If it were up to me we’d deal with the massive problem of lawyers costing us trillions of dollars in escalating health costs, etc. by making it a felony to be convicted of knowingly perpetuating false cases in court – let’s prosecute the lawyers themselves! I think 95% of all personal injury cases are bogus (but we as jurors share the blame for often rewarding this despicable behavior). And our criminal system isn’t remotely tough enough (why, for example, is it less of an offense to try and fail to murder someone? We’re rewarding failure when the intent was just as bad and therefore the people just as dangerous to society – the system should be about protecting society not an antiquated Quaker ideal of rehabilitation), though our legal system is racist (white collar crimes should earn as much time as non-white collar crimes that don’t involve violence but they don’t). “Innocent by reason of” as a concept should not exist. If someone is mentally challenged or on drugs or whatever, that is certainly a personal tragedy for them and their families but the rule of the courts is the protect society. It should be “Insane, but guilty.” Send them to a place that can handle their condition, but they should not be allowed to be released as soon as some doctor deems them “safe.” They should still do the time for the actions they are responsible for, regardless of capacity.

And I am a Democrat.

Why? Because the Republican Party I would like – the one that allegedly is about small government, fairness and promoting the American Dream of freedom and rewarding hard work, etc., is not the Republican Party I see. I know Republicans who are about all those things, but they are not the “base” of the party. The base of the party, and the actions of the party as a whole in the last couple decades, is in many ways the opposite of those principles. It is a party of elitism, a party of intolerance, a two-faced party that says its about “small government” but actually has made our government bigger than ever. Both Bush’s have spent far more than any of their modern Democratic rivals. Isn’t it ironic that between them it was Clinton who temporarily reduced spending. And the current Bush promotes policy after policy that intrudes on individual rights and liberties and ignores the fundamental Constitutional idea of States rights. The Patriot Act is not about Small Government. National restrictions on stem cell research are not about small government. Supporting the idea of a Constitutional ban on abortion is not about small government – that should be a state issue at best. Telling State’s that try to pass tougher clean air standards that the federal agency is not about small government. The bottom line is Bush and the base of the party are not really about “small government.” That’s all double talk, word play. They are for their selective notion of small government – any money that goes toward social programs that they are ideologically or theologically opposed to. But if it is an idea that matches their ideology and theology, suddenly imposing it on everyone at the Federal level is a great idea. That’s hypocritical. If you are really going to be about liberty and small, state-based government, you can’t cherry pick when you believe in it.

And when did the Republican Party become the war monger party? That is not its history. In fact both of our World War’s were led by Democrats in the White House. The Republicans even actively opposed U.S. involvement in both wars until U.S. assets and citizens were under direct attack. Republicans, even in this century used to espouse isolationism – “it’s not our fight.” The world has changed, as has our position in it, to be sure. But the principles have been more than warped. The classic Republican Party, and surely the one that espouses small government, would not have agreed with the principles of proactively starting wars, of asserting ourselves into conflicts without direct provocation simply because a subset of people in power deem it is in our national interests (not specifically national security) to do so. The stereotype of the Republican vs. Democrat parties in our lifetime has become “guns vs. butter” (i.e. military spending vs. social program spending). But why did this happen? Why can’t the Republican Party simply be the party that is for LESS spending? A lot less. As in most of our Federal spending, including on the military. We should spend on what is necessary to defend ourselves in every sense of the word and to assert ourselves when attacked against those who attack us (as in Afghanistan). But we don’t need to spend to be the most expensive military in the world and start wars the promote our agenda even when they aren’t ultimately defensive. That’s not small government.

I am not a huge fan of Obama or the Democratic leadership in Congress. I don’t like their support of Unions, their tax plans, their health care plans, or their likely social programs. I would love to vote for another party. But the idealized Republican Party that I would vote for has long since been highjacked by interests to which I am even more fundamentally opposed. Those who would spend more money that God mostly on guns, those who believe might is right and that the same liberties our Constitution guarantees us don’t apply to anyone else, those who would deny our fundamental liberties and try to force us to accept one particular religious view as over all others, in our schools and our government, those who would deny one gender its fundamental rights and hold it singularly responsible for the consequences of actions that involved both genders. I am opposed to the party that takes hundreds of millions a year from an organization whose mission is the warp a constitutional protection so beyond its intent that the Founding Fathers would be appalled all to promote “rights” based on false facts and premises that results in thousands of needless deaths a year, often children, while not making us even slightly safer. And I could go on…

It’s a tragedy really. Bring me back the Republican Party that sincerely is about small government and small spending, that really is about fair treatment and doing what is minimally necessary to promote our economy and security and I’ll sign right up. Seriously. I am a willing convert waiting for that day. Until this, you can keep Sarah Palin’s Party (I have never opposed her on “experience” but her fundamental values and beliefs) and continue to snicker with cynicism at the empty hypocrisy of its claims of “small government,” liberty and personal responsibility. And I will continue to see though the hollowness of its claims that “the other guy” is for re-distribution of wealth as if it isn’t as well. Etc.

In short, take back the Republican Party to what its supposed to be and I’ll sign up. Until then, I’m stuck with the lesser evil...

p.s. Vote for Win Cody! He represents what the party should be...

[publius]

Nobel Prize winning, Princeton economist, Paul Krugman, called the gop the "party of stupid".
It has devolved into the party of drinkin', fightin, cussin' hillbillies!
All of the Rockefeller republicans have defected to the Democrats.
OUCH!!!

[Guest]

Sorry, but Krugman even though he may have won the Nobel is still someone you would not want to cite if you have a basic understanding of policy. He's a grand standing writer and professor. When it comes to actual interpretation he's often wrong in his assessments. His talks of health care cite figures that go against all Kaiser studies and uses facts only as they are relevant to his arguements.

[Guest]

[Guest]