FacebookTwitterGoogle+RedditEmail

One Tiny Tax Reform, Billions for America

It’s no secret that the federal government needs more revenue going forward. Congress could put the Treasury on autopilot to raise billions (and ultimately tens of billions) year after year. Guided by fairness, it could enact spend-down rules for non-retirement accounts that mirror those for retirement accounts: at age 70 ½, require minimum distributions and tax all gains at ordinary income rates.

Let’s look first at the tax policy drawn up by lawmakers to govern the original individual retirement accounts (IRAs) in 1974. Then let’s see how the same policy points to duplicate rules for regular, non-retirement holdings.

Congress gave generous tax breaks to IRAs all through the build-up years. In fact they’re tax-free, starting with contributions and including realized and unrealized capital gains, capital gains distributions, and dividends. If markets rose (a solid long-term bet), compounding would add hugely to the value of the breaks.

On the back end, legislators turned the accounts into a fair and far-sighted bargain. They elected to tax all withdrawals as ordinary income—including the capital gains, normally taxed at much lower rates (currently 15%). Under this mandate, taxes that were forgiven all along are continually recouped at ordinary income rates as retirees cash in.

So it is that IRAs, 401(k)s and the like yield tens of billions in federal income taxes every year—all of which is actually repaying America for those decades of tax breaks. According to the latest estimatefrom the Internal Revenue Service, taxable income from retirement accounts (not including pensions and annuities) totaled over $254 billion in 2016.

For legislative foresight, it’s hard to beat the taxation rules laid down for retirement accounts. More revenue is streaming into the Treasury precisely when an aging America needs every dollar it can get—to shore up Medicare, Medicaid and Social Security, to replace and repair infrastructure, to see that more Americans get a college education, there’s no end to the nation’s pressing (and costly) needs.

Presciently, the annual inflow of new retirees means that revenue from retirement accounts is almost certain to increase. The actual numbers of course depend heavily on the stock market, which in the large has been a major plus. Wall Street’s bull run has surpassed 3,452 days, making it “the longest on record by most definitions.”

In another revenue boost, even the affluent who don’t actually need the money have to begin drawing down and paying back. Minimum distributions begin at age 70 ½ and continue at slowly increasing percentages each year.

On to non-retirement accounts and the case for treating them in like fashion. Holders of such accounts are also indebted to the Treasury for decades of tax breaks; they too should be required to take minimum distributions starting at age 70 ½, with the realized capital gains taxed at ordinary income rates.

Year after year, all their reported investment income gets taxed at a preferential rate. Year after year, they can avoid capital gains taxes by not realizing their gains—by simply buying and holding, while the markets and compounding drive the gains ever higher.

There’s also a final break that costs the Treasury dearly. In an egregious giveaway, unrealized capital gains can be wiped from the books by passing the holdings along to an heir. Through a loophole called the stepped-up basis, the value at the time of the transfer becomes the heir’s basis—erasing, and leaving untaxed, all the accumulated gains in the account. That break would vanish if Congress made minimum distributions a universal rule.

The comedian Rodney Dangerfield rose to fame with a signature line, “I don’t get no respect.” Retirement accounts, the vast majority defined-contribution, get no respect either. They’re regularly attacked for shifting the retirement savings burden to workers; far better and more secure, the critics say, were the defined-benefit pension plans that employers paid.

True enough—but there’s been little recognition of how completely defined contribution plans have outdistanced traditional pensions. Worker participation rates long ago eclipsed the pre-IRA highs. Total retirement savings have soared; likewise for company contributions. Lastly, as a fairness bonus, taxing capital gains the same as wages makes for less income inequality.

Over time though, the most inspired contribution of defined contribution accounts has to be those endless tens of billions in payback headed for the Treasury.  Congress could (let’s make that should) raise the revenue numbers another notch by applying the minimum distribution rule to regular accounts.

After all, why should retirement accounts be the only ones repaying the Treasury for tax breaks?

 

 

More articles by:

January 22, 2019
Patrick Cockburn
On the Brink of Brexit: the Only Thing Most People Outside Westminster Know About Brexit is That It’s a Mess
Raouf Halaby
The Little Brett Kavanaughs from Covington Catholic High
Dean Baker
The Trump Tax Cut is Even Worse Than They Say
Stanley L. Cohen
The Brazen Detention of Marzieh Hashemi, America’s Newest Political Prisoner
Karl Grossman
Darth Trump: From Space Force to Star Wars
Haydar Khan
The Double Bind of Human Senescence
Alvaro Huerta
Mr. President, We Don’t Need Your Stinking Wall
Howard Lisnoff
Another Slugger from Louisville: Muhammad Ali
Nicole Patrice Hill – Kollibri terre Sonnenblume
The Scarlet “I”: Climate Change, “Invasive” Plants and Our Culture of Domination
Jonah Raskin
Disposal Man Gets His Balls Back
Thomas Knapp
Now More Than Ever, It’s Clear the FBI Must Go
January 21, 2019
W. T. Whitney
New US Economic Attack Against Cuba, Long Threatened, May Hit Soon
Jérôme Duval
Macronist Repression Against the People in Yellow Vests
Dean Baker
The Next Recession: What It Could Look Like
Eric Mann
All Hail the Revolutionary King: Martin Luther King and the Black Revolutionary Tradition
Binoy Kampmark
Spy Theories and the White House: Donald Trump as Russian Agent
Edward Curtin
We Need a Martin Luther King Day of Truth
Bill Fried
Jeff Sessions and the Federalists
Ed Corcoran
Central America Needs a Marshall Plan
Colin Todhunter
Complaint Lodged with European Ombudsman: Regulatory Authorities Colluding with Agrochemicals Industry
Manuel E. Yepe
The US War Against the Weak
Weekend Edition
January 18, 2019
Friday - Sunday
Melvin Goodman
Star Wars Revisited: One More Nightmare From Trump
John Davis
“Weather Terrorism:” a National Emergency
Jeffrey St. Clair
Roaming Charges: Sometimes an Establishment Hack is Just What You Need
Joshua Frank
Montana Public Schools Block Pro-LGBTQ Websites
Louisa Willcox
Sky Bears, Earth Bears: Finding and Losing True North
Robert Fisk
Bernie Sanders, Israel and the Middle East
Robert Fantina
Pompeo, the U.S. and Iran
David Rosen
The Biden Band-Aid: Will Democrats Contain the Insurgency?
Nick Pemberton
Human Trafficking Should Be Illegal
Steve Early - Suzanne Gordon
Did Donald Get The Memo? Trump’s VA Secretary Denounces ‘Veteran as Victim’ Stereotyping
Andrew Levine
The Tulsi Gabbard Factor
John W. Whitehead
The Danger Within: Border Patrol is Turning America into a Constitution-Free Zone
Dana E. Abizaid
Kafka’s Grave: a Pilgrimage in Prague
Rebecca Lee
Punishment Through Humiliation: Justice For Sexual Assault Survivors
Dahr Jamail
A Planet in Crisis: The Heat’s On Us
John Feffer
Trump Punts on Syria: The Forever War is Far From Over
Dave Lindorff
Shut Down the War Machine!
Glenn Sacks
LA Teachers’ Strike: Student Voices of the Los Angeles Education Revolt  
Mark Ashwill
The Metamorphosis of International Students Into Honorary US Nationalists: a View from Viet Nam
Ramzy Baroud
The Moral Travesty of Israel Seeking Arab, Iranian Money for its Alleged Nakba
Ron Jacobs
Allen Ginsberg Takes a Trip
Jake Johnston
Haiti by the Numbers
Binoy Kampmark
No-Confidence Survivor: Theresa May and Brexit
Victor Grossman
Red Flowers for Rosa and Karl
FacebookTwitterGoogle+RedditEmail