well as far as an observation about the effect of the philosophy of "the giving of people according to their needs and taxing of those who can afford it", not very good. That philosophy has predated both Clinton and Bush administrations.
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There is a large amount of information on this subject here:
Resurrecting this old thread - I saw an article today which ties in closely. I don't have it handy, but the blog post which pointed me to this article also mentions the same point I made - that IRA and 401(k) deductibility isn't necessarily a "tax cost" inasmuch as ultimately taxes will still be due on that income when it's distributed from the accounts. Of course the deferral has a value, but so, too, does the future increase in investment value to the government when the taxes are ultimately collecte. It's not exactly a win-win, but it effectively transforms the income tax into a consumption tax - instead of paying taxes on income when it's earned, income taxes are collected on the portfolio when it's spent.
Anyway, here's the article from the WSJ the other day:
Tax-Overhaul Advocates Study Reagan-Era Reform
I encourage you to read it at their site. For convenience of discussion, though, I'm pasting in here the following:
Consider the list of the top 10 tax breaks, or "expenditures," as published by the Joint Committee on Taxation:
Deduction of mortgage interest on owner-occupied homes, Exclusion of employer contributions for health insurance Exclusion of retirement contributions and earnings Reduced rate of taxes on dividends and capital gains Exclusion of Medicare benefits Earned income credit Deduction of state and local taxes Deduction for charitable contributions Child tax credit Exclusion of capital gains at death
Some of them are more economically reasonable than others - as I said, the most supportable one is probably the retirement plan contributions one is very hard to actually compute a "cost" for. (One more thing it does, by the way, is convert capital gains into ordinary income, taxed at a higher rate!)
Others are pretty much entirely indefensible such as the employer contributions for health insurance. If there is going to be a tax break for that, and I'm not saying there should be, it should go to the individuals, not the employers.
Similarly, step-up basis at death doesn't make much sense, either. It's just a giveaway.
While that's true of the traditional IRA and 401k, it's clearly not true of their Roth cousins. I agree that the effect of traditional IRA/401k on tax revenue is extremely complicated. But in the end, my gut instinct is that it's a net tax expenditure.
More importantly, just because we can do a thing, it does not necessarily mean we should do that thing. Even if the traditional IRA/
401k turned out net tax INCOME, it's not necessarily a good thing. It's still social engineering. It still reduces the tax base and, therefore, increases tax rates. And there's just no need to incentivize saving for retirement. There's already an incentive - being able to retire.--Bill
Most people seem not to respond to the natural or artificial incentive in this case.
On this last point - I used to think that but I've come around on it. While it does end up being a give-away, the give-away is less than it seems for the simple reason that our capital gains tax ignores inflation. It makes sense to tax income, but can a change in nominal pricing due entirely to the changing purchasing power of the dollar be fairly called "income"? A home that goes from $50,000 to $200,000 might not represent any real gain. Step-up is a sloppy way of addressing this, but regardless, there is an argument that a great deal of those never-taxed gains represent no real increase in wealth - so might not fit the definition of income.
More broadly: adding an inflation adjustment to the calculation of taxable capital gains would accomplish a few goals -- there would less reason for having tax-deferred retirement accounts, you could do away with the capital gains rate, and you would incentivize long-term investment over short-term trading. This idea has been thrown out there a few times but it's a hard sell.
On that WSJ list everything around home ownership seems like the biggest give-away. Collectively those deductions just have the effect of inflating home prices to some extent, with the primary "benefit" being the ability for middle-to-high income earners to bid up the price of a home slightly higher, because the tax deduction effectively reduces the cost. It's a uniquely good time to do away with that deduction because so many mortgages today are at interest rates lower than the tax-adjusted rates of a few years ago. If people were OK with 6.7% with a tax break, they should be OK with 4.8% with no tax break. Of course, it'll probably never happen given the lobbies involved and the easy way to spin it as an attack on Main Street.
-Tad
what we need is a cost-BENEFIT analysis. People putting equity in their homes means they can draw upon that, rather than the government, when needed. Like, sell when they retire and move someplace less expensive, and have cash to boot.
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