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Revenue Estimates of Restricting Tax Deferral: It Ain’t Necessarily So
By Peter Brady
September 20, 2013
Fifth in a series of posts about retirement plans and the policy proposals surrounding them.
In previous Viewpoints posts, I explained that retirement contributions are neither tax deductions nor tax exclusions, but rather are tax deferrals. I also explained why, in my opinion, the two most prominent proposals to restrict qualified deferred compensation are flawed (post three and post four).
Now I’d like to provide a note of caution regarding revenue estimates associated with proposals to restrict retirement plan contributions.
Official revenue estimates will play a pivotal role in any effort to reform the federal income tax or to raise tax revenue. As part of the legislative process, any proposal that affects the tax code is “scored” by the Joint Committee on Taxation, and under the budgeting rules set by Congress, changes in revenue must be estimated over a 10-year budget period.
Initial Revenue Gains Will Be Partially Offset by Later Losses
As I explained in The Tax Benefits and Revenue Costs of Tax Deferral and previous posts, tax deferral changes the amount of revenue the government collects at three points. When compared to savings funded with compensation that is subject to tax and invested in a taxable account, tax-deferred savings generate:
- Less tax revenue when workers make retirement contributions
- Less tax revenue when investment returns are earned on the contributions
- More tax revenue when distributions are taken in retirement
Thus, any proposal that restricts tax deferred retirement contributions will have different effects on tax revenue over time.
Initially, tax revenue would be increased because compensation that would have been contributed to a qualified plan would instead be included in workers’ taxable compensation. In addition, if someone saving for retirement takes a portion of their compensation that otherwise would have been deferred and contributes it to a taxable account (after paying income taxes), tax revenue would be increased relative to current law because interest, dividends, and capital gains on the investments would be taxed. This effect initially would be small, but would grow over time. However, as individuals began to draw down their savings in retirement, the government would lose the revenue that it otherwise would have collected on withdrawals from tax-deferred retirement plans. This impact also would likely be small initially, but would grow over time.
Short-Term Gain, Long-Term Pain?
Because of the requirement to only consider changes in revenue over a 10-year budget period, a proposal to restrict or prohibit retirement plan contributions could look as if it raises considerable revenue. What would be missing from any official revenue estimate, however, would be the drop in future tax revenue when retirees draw down their savings in the years beyond the 10-year Congressional budget window.
Although the net long-term effect on tax revenue would still be positive, it would likely be less than the effect on revenue during the budget period. The shorter-term gain in revenue over the budget period would come at the expense of a reduction in tax revenue when today’s workers retire.
Other Posts in this Series:
- Retirement Plan Contributions Are Tax-Deferred—Not Tax-Free
- Marginal Tax Rates and the Benefits of Tax Deferral
- A ‘Modest’ Proposal That Isn’t: Limiting the Up-front Benefits of Retirement Contributions
- Tax Reforms Should Not Favor DB Plans over DC Plans
Peter Brady is a senior economist at ICI.
Tax Reforms Should Not Favor DB Plans over DC Plans
By Peter Brady
September 19, 2013
Fourth in a series of posts about retirement plans and the policy proposals surrounding them.
In The Tax Benefits and Revenue Costs of Tax Deferral and in two previous Viewpoints posts (post one and post two), I explained the benefits that workers get from deferring tax on compensation set aside for retirement.
A ‘Modest’ Proposal That Isn’t: Limiting the Up-front Benefits of Retirement Contributions
By Peter Brady
September 18, 2013
Third in a series of posts about retirement plans and the policy proposals surrounding them.
Marginal Tax Rates and the Benefits of Tax Deferral
By Peter Brady
September 17, 2013
Second in a series of posts about retirement plans and the policy proposals surrounding them.
In a previous Viewpoints post, I discussed the difference between tax deferral—the tax treatment applied to retirement savings—and tax deductions and exclusions, such as the mortgage interest deduction or the exclusion of employer-paid health insurance premiums from income. The difference is often overlooked or misunderstood, leading to inaccurate analysis and harmful policy proposals.
Retirement Plan Contributions Are Tax-Deferred—Not Tax-Free
By Peter Brady
September 16, 2013
First in a series of posts about retirement plans and the policy proposals surrounding them.
In today’s fiscal and political climate, taxes are never far from politicians’ minds. Whether to achieve comprehensive tax reform or to raise revenue to meet budget deficits, members of Congress are now considering changes to a range of tax code provisions—including those governing retirement policy. Any comprehensive effort to address fiscal policy or tax reform should examine every option, but some discussions of retirement policy have been misguided. The tax treatment of retirement savings—tax deferral— too often has been lumped together with tax deductions (such as the deduction from income of mortgage interest expense) and tax exclusions (such as the exclusion from income of employer-provided health insurance premiums).
Get a Closer Look at Closed-End Funds
By Daniel Schrass
July 30, 2013
ICI has recently updated several of its key closed-end funds resources.
Key Points to Remember on Fund Fees
By Sean Collins and Bob Grohowski
July 12, 2013
Over the past two decades, investors have paid less and less to own shares of mutual funds.
GMM Panelists Discuss Retirement Savings and Financial Education
By Miriam Bridges
May 17, 2013
Americans need greater access to savings vehicles and better financial education to help ensure that they use them effectively, fund industry experts told attendees at the 53rd Annual General Membership Meeting.
At GMM Policy Forum, Secretary of Education Duncan Offers Steps to Address Education Crisis
By Miriam Bridges
May 9, 2012
America faces a skills crisis and other deep challenges in education, said U.S. Secretary of Education Arne Duncan at the annual GMM policy forum, part of ICI’s 54th General Membership Meeting. In a conversation with ICI President and CEO Paul Schott Stevens, Secretary Duncan offered a range of ways to address these challenges, including specific recommendations for the fund industry.
‘One Size Fits All’ Doesn’t Fit Today’s Fund Investors
By Brian Reid
August 16, 2011
David F. Swensen is the chief investment officer of Yale University and a noted author of investment advice for the public. In books and articles over the last decade, he’s focused much of his attention on mutual funds. Yet he consistently ignores or is unaware of basic facts about how mutual funds operate, how investors seek and use funds, and how individuals manage their portfolios—gaps on full display in his latest commentary in the New York Times last weekend.
Check Your Savings Goals Next Week
By Sue Duncan
February 16, 2011
“America Saves Week” kicks off this Sunday, February 20. ICI and the ICI Education Foundation(ICIEF) encourage Americans to use the week as an opportunity to assess their savings activity and savings goals.
TOPICS: Investment Education