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February 02, 2003

Creating Tax-Free Heirs

How's this for tax cut genius? Let's hand a tax cut to the wealthy that doesn't cut revenues during my administration? In fact, let's promote some social value -- say saving for retirement -- and pay for it by gutting revenue for social services in the future.

Well, the first version of this were called Roth IRAs-- retirement accounts that get no tax break now but who accumulate capital gains and dividends tax free and whose distribution upon retirement is also tax free.

Kicking into gear in 2006, under the 2001 tax plan, were Roth 401(k)s which would up the ante by allowing people to have their whole retirement income tax free down the line with a new streamlined version being proposed called Lifetime Savings Accounts.

I wrote a column about the horrors of these kinds of accounts a while ago called 401K Pension Tax Breaks: A $330 Billion Boondoggle for the Rich. As I noted at the time:

Unfortunately, the 401K problem will only gets worse under present law. Last year's tax law introduced a new kind of 401K plan, labeled the Roth 401K after its original Senate sponsor, which will begin in 2006. The innovation of the Roth 401K is to tax the original contribution but to exempt all future increases in value from taxation, forever. This means that upper-income taxpayers will be able to amass vast multi-million dollar fortunes that will be immune from taxation for all time.

The new rules allow owners of these Roth 401K fortunes to not only pass them on tax-free to children and grandchildren, but allow those beneficiaries to continue accumulating and spending money from the Roth accounts free of income tax. Imagine a Roth 401K owner in twenty years with $1 million in his account at death; he leaves $100,000 to each of ten grandchildren. Under the exponential math of compound interest, those grandchildren could each enjoy by some estimates as much as $50-100 million of tax-free income over their lives from these Roth 401K bequests.

Not only does this threaten the bankrupting of funding for government services in the future, but the 401K system will create a whole privileged class of wealthy heirs living in a special tax-free world all their own.

Before that day comes, we need to stop the Roth program and end the $330 billion 401K boondoggle for the wealthy.

Forget the Estate Tax-- these kinds of tax-free savings accounts are a way to leave not just money to children and grandchildren, but leave them the right to tax-free income for the rest of their lives! But combine the elimination of the estate tax with Roth-style savings accounts left to one's heirs, and we have the making of a new kind of inherited plutocracy whose income streams are untouched by taxation.

And remember that parents and grandparents can also build up the tax-free income of their hiers while they are alive by giving directly to their IRA or, now, Lifetime Savings Accounts. By the time every rich kid is 21, they'll likely have something like $300,000 in assets in their Roth-like accounts. Compound that by the time they retire -- or need a home or anything else they can use the accounts for -- and they'll be living pretty tax-free while the tax burden falls only on those earning wages day to day.

Let's be clear, if progressives ignore this danger, we are missing the greatest class war designed on behalf of the non-working rich in American history. This is a plan to leave the investment class completely untaxed over generations, while leaving all tax burdens on those living by wages alone.

For a bit more, read a few professional descriptions of how this works here and here.

Posted by Nathan at February 2, 2003 08:24 AM

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