By James Kwak
In chapter 7 of White House Burning, we proposed to eliminate or scale back a number of tax breaks that I benefit from directly, including the employer health care exclusion, the deduction for charitable contributions, and, most importantly, tax preferences for investment income. We did not, however, go after tax breaks for retirement savings, on the grounds that Americans already don’t save enough for retirement.
Well, in my latest Atlantic column, I’m going after that one, too. I changed my mind in part for the usual reason—the dollar value of tax expenditures is heavily skewed toward the rich. But the other reason is that the evidence indicates that this particular subsidy doesn’t even do what it’s supposed to do: increase retirement savings. Instead, we should take at least some of the money we currently waste on tax preferences for 401(k)s and IRAs and use to shore up Social Security, the one part of the retirement “system” that actually works for ordinary Americans.
Of course, this isn’t going to happen anytime soon. President Obama proposed capping tax-advantaged retirement accounts at $3.4 million, which is a step in the right direction. ($150,000 would be a better limit, since most people reach retirement with far less in their 401(k) accounts.)* But even that was attacked by the asset management industry as theft from the elderly.
* Yes, I know about the issue of small business owners who only set up accounts for their employees because they want to benefit from them themselves. It’s a red herring. First, if an employer doesn’t have a 401(k), employees can contribute $5,000 to an IRA—and $5,000 is a lot more than most middle-income, small business employees are currently contributing. Second, the right solution would be to default everyone into a retirement savings account instead of relying on employers to decide whether or not to set up 401(k) plans.
The Baseline Scenario 
Solution is simple: Increase income taxes AND credits for saving for anyone who makes over 100k. Redistribute consumption, not income.
So until Kwak has more personal taxes in the game, looks like the “little people” should get to decide who to invade next – I vote for invading Texas. Clear evidence there of them having set off a chemical weapon of mass destruction…
This article reminds me of Assad’s wife doing internet shopping….redistribute “consumption”….
It’s not what the small businessman actually contributes, it’s that he sees the loophole and that little green monster in his head, with the help of his tax adviser, starts telling him look at what you can do, just like the rich guys! He/she just never run the numbers to see what they can really make.
Public/ Not for Profit and Union pensions over 90k should lose any tax advantage also. It is only fair if you are attacking IRAs. I am true blue and left of center..AND self employed. That “HUGE IRA” of “3 million” with the recommended 3.0% withdrawal is only the 90k pension equivalent.
Rumors of a “DEBT THREAT” is largely created by Oligarch funded media scare campaigns and James Kwak.
Part of the “success” of 401k’s is defined by popularity, as in more people have 401k’s than defined-benefit pensions (therefore they must be successful, look how many people have them, they must be so popular…). But most people genuinely do not understand the differences between 401k’s and pensions, other than to understand that a pension locks employee to one job and a 401k is portable (unpopularity of job lock is one of the ways 401k’s were sold to the public as better than traditional pensions). The fact of tax advantage is also understood but many people cannot fully comprehend tax math so it’s likely that many only partially understand the numbers advantaged by their 401k/IRAs.
So. Is it possible to demonstrate (to those who do not always accurately perceive the values of their numbers) that we can “save” for retirement more effectively by paying more appropriate levels of tax up-front and that after-tax income can be more valuable and useful than the amounts “saved” through tax-advantaged 401k/IRAs?
For example, people relate to slogans like “you have to spend money to make money” and “you get what what you pay for” but the cultural psychology is firmly convinced that taxes are bad, which is a big part of the sales pitch that convinced Americans that 401k’s will provide more prosperous, more reliable retirement security than Social Security. But the examples of Germany, Denmark, Sweden etc show that individuals can have better quality of life, including greater financial security (and more vacations), by paying higher rates of taxes. That’s counter-intuitive to most Americans but once understood, paying taxes for retirement and health care looks practical, useful, and cost effective. But that can be hard to demonstrate to people who already struggle with tax math, don’t accurately perceive the value of their own numbers, don’t adequately understand the financial instruments they utilize, and don’t know that people in other countries are better off because of the taxes they pay.
So if that can be simply explained that would be great. :-)
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