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:
September 17, 2018
Melvin Goodman
What is to be Done?
Rob Urie
American Fascism
Patrick Cockburn
The Adults in the White House Trying to Save the US From Trump Are Just as Dangerous as He Is
Jeffrey St. Clair - Alexander Cockburn
The Long Fall of Bob Woodward: From Nixon’s Nemesis to Cheney’s Savoir
Mairead Maguire
Demonization of Russia in a New Cold War Era
Dean Baker
The Bank Bailout of 2008 was Unnecessary
Wim Laven
Hurricane Trump, Season 2
Yves Engler
Smearing Dimitri Lascaris
Ron Jacobs
From ROTC to Revolution and Beyond
Clark T. Scott
The Cannibals of Horsepower
Binoy Kampmark
A Traditional Right: Jimmie Åkesson and the Sweden Democrats
Laura Flanders
History Markers
Weekend Edition
September 14, 2018
Friday - Sunday
Carl Boggs
Obama’s Imperial Presidency
Joshua Frank
From CO2 to Methane, Trump’s Hurricane of Destruction
Jeffrey St. Clair
Maria’s Missing Dead
Andrew Levine
A Bulwark Against the Idiocy of Conservatives Like Brett Kavanaugh
T.J. Coles
Neil deGrasse Tyson: A Celebrity Salesman for the Military-Industrial-Complex
Jeff Ballinger
Nike and Colin Kaepernick: Fronting the Bigots’ Team
David Rosen
Why Stop at Roe? How “Settled Law” Can be Overturned
Gary Olson
Pope Francis and the Battle Over Cultural Terrain
Nick Pemberton
Donald The Victim: A Product of Post-9/11 America
Ramzy Baroud
The Veiled Danger of the ‘Dead’ Oslo Accords
Kevin Martin
U.S. Support for the Bombing of Yemen to Continue
Robert Fisk
A Murder in Aleppo
Robert Hunziker
The Elite World Order in Jitters
Ben Dangl
After 9/11: The Staggering Economic and Human Cost of the War on Terror
Charles Pierson
Invade The Hague! Bolton vs. the ICC
Robert Fantina
Trump and Palestine
Daniel Warner
Hubris on and Off the Court
John Kendall Hawkins
Boning Up on Eternal Recurrence, Kubrick-style: “2001,” Revisited
Haydar Khan
Set Theory of the Left
Farhang Jahanpour
Fascism and Islamic Fundamentalism
Sandy Tolan
After Oslo: How Peace Became a Dirty Word in the Middle East
Nino Pagliccia
The United States’ Disregard for International Law is a Menace to Venezuela and Latin America
Peter Certo
Nobody in the White House is Part of The Resistance
Fizz Perkal
Prison Labor is Slave Labor and We Should Get Rid of It
RS Ahthion
Two Long-Standing American Traditions: Committing War Crimes & Ignoring International Law
Ralph Nader
Where is the Democrats’ Contract with America 2018?
George Wuerthner
The Threat to Montana’s Wilderness
Rev. William Alberts
The Normalizing of Immorality
Chuck Collins
The Wealth Hiding in Your Neighborhood
Russell Mokhiber
Facebook Dostoevsky Postman and the Demise of Deliberative Democracy
Arnold August
Cuba’s ‘Sonic Attacks’ vs Edinburgh University: The 40% Mystery
Luke Ruediger
Smoke, Haze and Hypocrisy at the BLM
Jim Hightower
Amazon is Worth $1 Trillion, So Why is It Robbing Taxpayers?
FacebookTwitterGoogle+RedditEmail