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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.

Additional Resources:

The Tax Benefit and Revenue Costs of Tax Deferral

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.

TOPICS: 401(k)Investment EducationMutual FundRetirement PolicySavingsShareholderTaxes

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.

Read more…

TOPICS: 401(k)Investment EducationMutual FundRetirement PolicySavingsShareholderTaxes

Getting the Facts Right on Money Market Funds

By Paul Schott Stevens

September 18, 2013

This week, I testified before Congress at a hearing on the issue of money market funds and recent regulatory proposals from the Securities and Exchange Commission (SEC) that would amend the rules governing these funds.

The hearing provided an excellent opportunity to continue to educate Congress on the benefits that money market funds bring to investors and to the economy as a whole. In my testimony, I emphasized the Institute’s views on making sure that regulatory proposals do not upset the crucial role that money market funds play.

Read more…

TOPICS: Financial MarketsGovernment AffairsMoney Market FundsTreasury

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.

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. 

Read more…

TOPICS: 401(k)Investment EducationMutual FundRetirement PolicySavingsShareholderTaxes

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.

Read more…

TOPICS: 401(k)Investment EducationMutual FundRetirement PolicySavingsShareholderTaxes

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).

Read more…

TOPICS: 401(k)Investment EducationMutual FundRetirement PolicySavingsShareholderTaxes

A Step in the Right Direction on FTTs

By Keith Lawson

September 10, 2013

In a noteworthy development for anyone following the debate around financial transaction taxes (FTTs), the Council of the European Union Legal Service has issued a legal opinion regarding the FTT proposal under consideration by some EU member countries.

Read more…

TOPICS: ICI GlobalTaxes

CAP Claims About the 401(k) System Are Misguided

By Paul Schott Stevens

September 4, 2013

The concerns of the Center for American Progress about the 401(k) system (covered August 20 in “A Better Way to Save for Retirement?”) are mistaken.

Read more…

TOPICS: 401(k)Retirement PolicyRetirement ResearchSavings

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