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<< Remarkable Photo | Main | Why MoveOn matters >> June 23, 2003How 401Ks are Bankrupting USForget Bush's cuts in tax rates or even the cuts in dividend taxes-- those are short-term and can be reversed relatively easily by a future progressive administration -- it's worth remembering that the top rate of 28% pushed through in 1986 was rapidly pushed to over 40% by 1993. But the real scary action from the 2001 tax cut were the expansions of 401Ks. "Tax-deferred savings" are costing the government big money. How much. Read this story from the Wall Street Journal.: Tax deferrals amount to $3 trillion of the $11 trillion. That is, if the deposits in these accounts had been saved and invested without tax preferences, and the interest, dividends and capital gains earned and reinvested in these accounts had been subject to income tax, the federal government would have taken in an extra $3 trillion -- an amount that happens to be fairly close to the entire national debt held by the public. In almost every year since 1980, the annual addition to deferred taxes has exceeded the federal deficit.The dollar amounts are scary enough, but the politics are worse. Conservatives are looking for the fight over taxation of these accounts in retirement to shore up anti-tax politics: the enormous size of the accumulated balances and the vast numbers of households holding tax-deferred assets will add a third side to the future political economy of budget policy. The first side is the huge weight of Social Security, Medicare and other spending programs benefiting baby boomers and requiring higher payroll and income taxes. The second side is the younger workers resisting those taxes. The new third side is the retirees also seeking lower tax rates in order to retain as much of their retirement savings as possible.But the politics gets even nastier as you move towards the new "Roth 401Ks" that will allow tax-free distributions, not just in retirement, but to heirs. As I wrote here: 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.So watch the tax-free retirement account politics. They will define the real politics of inequality in coming decades. Posted by Nathan at June 23, 2003 03:36 PM Related posts:
Trackback PingsTrackBack URL for this entry: CommentsYour link to the story is to "The Free Republic", not the Wall Street Journal. I looked for it online (I'm a WSJ subscriber) and found it at the link below. Just thought I'd let you know. Wall Street Journal has a conservative editorial bias and is a good source of objective journalism. "The Free Republic" is merely biased. Barron's Online Posted by: squiddy at June 26, 2003 11:43 AM The holy trinity of right-wing tax policy involves 1) eliminating taxation of unearned income; 2) eliminating the estate tax; and 3) eliminating the rule against perpetuities. The Republican party has taken several steps to implement 1), with considerable Democratic help. The latest tax cut was just a downpayment. The Roth 401(k), as Nathan explains and has explained, is another. Various tax-free spending accounts are yet another. The votes this week in the House on the estate tax are truly depressing. The Democratic "alternative" to a 0% estate tax was an exclusion of $3M ($6M for married couples) from taxation. The rule against perpetuities is what keeps trusts and the like from being permanent fixtures. These are essential to re-establishing an aristocracy, and the gatekeepers are state legislators: be very, very afraid. In Florida, a trust can now have a lifetime of 360 years; in Alaska, the limit is 1,000 years; in South Dakota, it's when the next ice age puts the state under a mile of ice (just kidding: it's unlimited). Today, one can only put into such a trust, tax-free, one's limetime gift tax exemption. Tomorrow, or at least a few years from now, there may be no limit. Posted by: Tim Francis-Wright at June 26, 2003 02:32 PM A humble request from a progressive who gets the importance of these economic issues but doesn't understand the lingo. I really want to understand these issues and participate in the discussion, but my brain goes numb at the mention of terms like "divident taxes" or phrases like "retrospectively indexes the definition of income." HELP! If possible, please provide links to background information when discussing the economy. Posted by: KJ at June 28, 2003 08:55 AM A humble request from a progressive who gets the importance of these economic issues but doesn't understand the lingo. I really want to understand these issues and participate in the discussion, but my brain goes numb at the mention of terms like "divident taxes" or phrases like "retrospectively indexes the definition of income." HELP! If possible, please provide links to background information when discussing the economy. Posted by: KJ at June 28, 2003 08:55 AM How can the $3 trillion in retirement assets be a negative? I thought that was great news of which I knew was out there but didn't no the totals. The only concern is that when people start having to liquidate the $11 trillion will only be sold for $7 trillion. As far as Roth's are concerned, let's remember there is an income limitation of roughly $100,000 and a limit of $3,500 in contributions. People making under $100,000 aren't contributing $3,500 every year. There spending it in many cases. But even if they did save, this benefit isn't nearly as large as the death exclusion amount. Remember also that the principle has already been taxed. And the gains will be taxed when it is removed from the account. Do you want to tax the same principle twice? No where is income taxed like that for individuals. This information is a positive and not a negative. I will say that like all things the smart people will end up making the most of the situation. You have to be careful not to contribute to much to these plans, because when you withdraw the real tax benefit is being able to be in a lower bracket. But if you're having to use this money as your spending money, you may start bumping up to where you're not in a lower bracket. Posted by: Chad Peterson at July 1, 2003 10:20 AM Your analysis of the effects of the Bush tax cuts run contrary to the reality that the economy is getting stronger and more jobs are being created (308,000 last week). Perhaps you should back off from Bush-bashing and confess that you are wrong. Are you big enough to do that? Posted by: Dilip Abayasekara at April 7, 2004 03:27 PM Your analysis of the effects of the Bush tax cuts run contrary to the reality that the economy is getting stronger and more jobs are being created (308,000 last week). Perhaps you should back off from Bush-bashing and confess that you are wrong. Are you big enough to do that? Posted by: Dilip Abayasekara at April 7, 2004 03:29 PM Post a comment
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