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Michael Swartz / October 27, 2017

A Taxing Debate About Retirement

Are there changes coming to taxation on 401(k)s? Depends on who you ask.

Last week we were waxing bearish on the prospect of actually seeing President Donald Trump’s tax cuts pass. But a significant initial step came this week when the House approved a budget blueprint that would allow for better control of the GOP’s tax legislation, placing it under the budgetary rules in place to prevent Senate minority Democrats from denying cloture. Not all Republicans voted for the bill — it passed by a thin 216-212 margin — but several of those GOP members voting no did so in symbolic fashion to express their opposition only after enough votes were there for passage. House Majority Leader Kevin McCarthy expressed his belief that some of the 20 holdout Republicans “will be there for tax reform” because they were only objecting to the budget.

The House Republicans who most loudly opposed the measure were those most vulnerable to Democrat challenge next year. Coming mostly from longtime blue states such as New Jersey and New York, these dozen GOP moderates were upset about the idea of tax reform including the phase-out of the deduction for state and local taxes, as their overtaxed constituents use that deduction more often than most Americans. Losing it would certainly hit those states hardest, but it would also bring more to the Treasury.

A second point of objection expressed by members and conservative pundits alike was the prospect of severely curtailing the tax benefits of the retirement accounts that millions of Americans use to shelter funds from the tax man. Oddly enough, they took their cues from the man at the top this time: “There will be NO change to your 401(k),” President Trump tweeted. “This has always been a great and popular middle class tax cut that works, and it stays!”

Sharply limiting this practice, or converting these accounts to be like the less popular Roth IRAs (which are taxed now but tax-free upon withdrawal, the inverse of a standard IRA) would be an easy target for Democrat and media demagoguery. Witness the rhetoric of Oregon Democrat Sen. Ron Wyden, who warned that Republicans “cannot keep their hands off your 401(k).”

Yes, the hypocrisy can be cut with a knife. Just four years ago, the shoe was on the other foot because Barack Obama thought some people had too much retirement money stashed away. Two years later, it was tax-free college savings that seemed like a ready pool of cash for Obama to take from the rich. Wyden didn’t object to that bill, by the way, and in 2010 he co-sponsored a tax bill that proposed many of the same things — such as fewer brackets, a lower top rate, a reduced number of deductions, and a slashed corporate tax rate — that Donald Trump’s tax reform is advocating today. The only difference is the occupant of the Oval Office.

Yet even if changes are made, there are legitimate arguments that Roth-style 401(k)s make some sense from a retirement standpoint and won’t negatively affect savings rates. The biggest gamble with the Roth IRA is that someone will change the rules before you retire. After all, once upon a time Social Security benefits were tax-free, too.

These changes to the individual tax burden are drawing the most press, along with the tired old Democrat mantra of “tax cuts for the rich” that the media blurts out like it’s breaking news. This lead item has pushed the equally radical proposed changes to corporate taxes to the back burner, but there’s an even larger problem with the framework needed to commence the necessary sausage-grinding for tax reform. “We’re about to go through Class 5 rapids,” said House Speaker Paul Ryan, referring metaphorically to the hordes of lobbyists preparing to swarm Capitol Hill in the attempt to preserve their clients’ tax breaks and carve-outs. “We’ve got to make sure everybody stays in the boat and we get the boat down the river.”

We know that leftists will object no matter what conservatives try to do, but with this budget Republicans have placed themselves in a no-win situation. There are enough so-called “cuts” in entitlement programs to provide a long heyday for Democrat naysayers, but not enough to really improve our long-term financial solvency, let alone get government back to its proper role. Even with the Congress and White House belonging to the party that has long preached fiscal responsibility, members of our legislative body are confessing this budget framework once again kicks the can down the road in areas that desperately need reform.

And while fiscal responsibility is the first casualty of this new deal, the part that survives but deserves to die is the notion that tax cuts must be “paid for.” Disregard the faulty static analysis that leads opponents to whine that cutting taxes costs the government money, and ask the larger question: Whose money it is anyway?

Real people have to hope that their annual raise is enough to cover their increasing expenses. A single vote or a simple change to a few lines in the tax code allows the IRS to reach more deeply into our collective pockets. Unfortunately, the people don’t seem to have a lobbyist to beseech Uncle Sam to give them a break — unless, of course, you’re one who doesn’t mind getting more from the national treasury and hasn’t noticed the chains that accompany this gift.

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