The fiscal cliff deal raised investment taxes by 60%. Now President Obama wants to take a couple more shots against savings and investment. From his new budget:
The Budget also puts forward a specific proposal to comply with the Buffett Rule, requiring that wealthy millionaires pay no less than 30 percent of income—after charitable contributions—in taxes. This proposal will prevent high-income households from using tax preferences, including low tax rates on capital gains and dividends, to reduce their total tax bills to less than what many middle class families pay. …
Individual Retirement Accounts and other tax-preferred savings vehicles are intended to help middle class families save for retirement. But under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving. The Budget would limit an individual’s total balance across tax-preferred accounts to an amount sufficient to finance an annuity of not more than $205,000 per year in retirement, or about $3 million for someone retiring in 2013. This proposal would raise $9 billion over 10 years.
“Substantially more than is needed to fund reasonable levels of retirement saving.” The Nanny State: Enough fatty foods, enough soda, enough retirement.
Quick econ lesson: The key flaw of any income tax is that it penalizes saving. That’s bad. The reduction in capital accumulation reduces labor productivity and lowers real wages throughout the economy, depressing the standard of living of future generations. Some studies have found that a switch to consumption taxation would increase the size of the US economy by as much as 9%.
But the capital gain tax preference and various savings accounts such as IRAs and 401ks help offset the tax code’s anti-savings bias. That’s good for growth. But Obama keeps trying to dismantle these work-arounds in the name of fairness. In this case, more fairness equals less economic growth.
Side note: This reminds me that many Dems dislike 401k plans. They would agree with Teresa Ghilarducci, a professor at the New School of Social Research, who wants to eliminate the preferential tax treatment of the popular retirement plans. In their place, she would have workers transfer their dough into government-created “guaranteed retirement accounts” for every worker.
Back in 2009, Ghilarducci testified before Congress. At that hearing, Rep. Jim McDermott, a Democrat from Washington, said that since “the savings rate isn’t going up for the investment of $80 billion [in 401(k) tax breaks], we have to start to think about whether or not we want to continue to invest that $80 billion for a policy that’s not generating what we now say it should.”