All posts by Gerald E. Scorse

Rich Getting Richer Via Tax Policies

“I’ve been rich and I’ve been poor. Believe me, rich is better.” This famous quote has always been true, but never as true as today. After decades of dominance by the right, here’s the 2019 version:

“I’ve been rich and I’ve been poor. Believe me, rich is insanely better.”

The insanity stems from tax policies. Marginal income tax rates plunged starting in the 1980s, hitting their modern-day lows under President George W. Bush. After rising modestly during the Obama Administration, they fell again under President Trump.

Rate cuts generate only part of the current bonanza. Tax breaks passed by various Congresses account for the rest, hugely increasing the billions that flow to the haves.

So, insanely, taxes really are making the rich richer. With inequality soaring, they’re widening the income gap instead of making it smaller.

All taxpayers get at least modest breaks, but the big money goes to those who need it the least: income is redistributed upward, with disproportionate shares going to the top percentiles.

The most blatant example literally “wills” capital gains (and capital gains taxes) away. With the stroke of a pen, when assets such as real estate and equities are passed along to heirs, all unrealized capital gains are wiped out. The assets are revalued and given a new basis price, their worth at the time of transfer.

It’s called a step-up in basis, and it can happen again and again. As a result, wealth can pass untaxed from one generation to the next.  (Retirement accounts get no such break, but non-retirement holdings do — and guess who has those.)

In another fiscal favor to the rich, income from wealth is taxed at a lower marginal rate than income from work. The federal rate on long-term capital gains and dividends is 20 percent, well under the 37 percent top rate on income from wages and salaries. The highest earners do pay an Obama-era surcharge of 3.8 percent on investment income; even so, they still save more than a third compared to the tax on income from labor.

This break in particular acts as rocket fuel for income inequality. With income from capital becoming an ever-greater share of total income, a lower rate drives up the fortunes of wealthy Americans and leaves middle America farther and farther behind.

Tax expert David Cay Johnston ran the Internal Revenue Service numbers.  From 1961 through 2013 (the latest year for which data is available), the 400 richest Americans saw their federal income taxes drop from 42.4 cents on the dollar to 22.9 cents. For 2013, adjusted for inflation, that gave the top 400 an average $195.4 million in extra after-tax income. The vast majority of Americans took home more dollars too: an average of $6,812.

It’s the ratio, Johnston wrote, “that may take your breath away.” After more than 50 years of deliberate tax policy choices, here it is:

For each dollar of increased after-tax income enjoyed by the vast majority in 2013, the top 400 enjoyed $28,684 more. That’s $28,684 to $1.

The ratio can always go higher and probably already has; it came before the Trump tax cut, which delivered its own special breaks to the rich.

One of those more than doubled the estate tax exemption, raising it from $5.5 million to $11.4 million for an unmarried person. A couple can shield twice that amount, or $22.8 million.

It was a major anti-estate tax victory, but only the latest in a streak going back to 2001: the exemption back then topped out at $675,000, or $1.35 million for a couple. Legislation passed in that year gradually raised the totals to $3.5 million/$7 million by 2009. Congress later upped those exemptions as well, and the 2017 law has raised them to new highs.

According to “death tax” propaganda, estate taxes amount to double taxation of a lifetime’s hard-earned income. According to the facts, “unrealized capital gains account for almost half of the fair market value of estates.” Under the stepped-up basis (see paragraphs 7 and 8), those gains will never be taxed, period.

Let’s end with an exclamation point. From 2014-2023, two tax breaks alone will put the haves up by an estimated $1.984 trillion. Just from lower taxes on capital gains and the stepped-up basis, those who need nothing will be up by nearly $2 trillion.

That $2 trillion should be going to the common good, not to the well-off. Congress can make it happen by ending tax breaks that do little more than make the rich richer.

• This piece first appeared at www.nydailynews.com

A Wall Street Boost for Social Security

The aging of America is putting the squeeze on Social Security. About 10,000 baby boomers turn 65 every day and the number is heading even higher. Ready or not, our retirement system faces its first major overhaul in decades.

Lawmakers should listen to Warren Buffett before they settle on any new payroll tax or benefit schedules. “I’m a card-carrying capitalist,” Buffett says, “I believe we wouldn’t be sitting here except for the market system.”

Social Security should become a card-carrying capitalist too. It should invest part of its $2.8 trillion trust fund in the stock market, specifically in broad-based, low-cost index funds.

Call it a Wall Street boost for Social Security. It could make the coming overhaul less costly for workers and employers alike. It would effectively give tens of millions of low- to middle-income workers their first share ever in the market. Lastly, it’s the smart thing to do: research has shown the reward easily justifies the risk.

Trust fund dollars have always been invested in ultra-safe government securities. The idea of seeking higher returns by putting some of the money into stocks has been proposed before, but it’s never gone anywhere.

The coming reform (the first since 1983 and only the second ever) gives Congress a chance to begin making up for lost time.

And for lost opportunities too. By mid-March of 2019, the S&P 500 had risen by more than 300 percent from its financial-crisis low in March 2009. According to Goldman Sachs, the index’s annualized gain of over 15 percent represents one of its best decades ever.

The huge bull run didn’t add a penny to the Social Security trust fund. In fact, the fund’s return over the same decade was lower than usual: many of its holdings were paying (and still are) abnormally low interest rates.

All the more reason to make sure a stock market boost becomes part of the overhaul. Let’s give the trust fund its first chance for substantial gains. Let’s keep pushing back the year the fund runs dry. The program’s trustees now estimate it’ll happen in 2035. If Congress doesn’t act before then, benefits will have to be cut by roughly 25 percent.

Both parties are well aware of the crunch. As usual these days, they’re gridlocked on what to do.

Republicans think the problem can be solved with just two words: stingier and shorter. Their proposals would hit future recipients with the double whammy of lower benefits and a later retirement age (an idea Buffett has also floated).

Democrats have lined up solidly behind a bill that goes in the opposite direction. It increases payouts by two percent and sweetens the formula for cost-of-living adjustments (COLAs). The money to pay for it would come from higher payroll taxes, especially on the biggest earners.

Payroll taxes are currently not collected on wages greater than $132,900. The Democratic bill would tax all earnings over $400,000. The rate itself (levied on both workers and employers) would rise 0.1 percent per year from 2020 to 2043, going from the current 6.2 percent to 7.4 percent. The system’s actuaries say these changes would keep the fund solvent into the 2090s.

All well and good, but adding a Wall Street boost could make the reform even better. The tax increase could be smaller. The trust fund’s solvency could be extended into the 22nd century. Millions of workers without workplace retirement plans could reap some of the same stock market gains as workers who have them.

Alicia H. Munnell lives and breathes retirement policy. It was her calling card for a top job in the Clinton Administration. Since then she’s been a professor at Boston College, where she founded and directs its Center for Retirement Research. In 2006 she co-authored the definitive book Social Security and the Stock Market.

It’s a probing, scholarly work. It doesn’t minimize the risks, including the political risks of putting the government in charge of investment decisions. It cites hundreds of facts, including these:

After all, stocks yield 7 percent after inflation and bonds only 3 percent.

Two types of government pensions in the United States already invest in equities with no apparent ill effects,” the Thrift Savings Program for federal employees and state and local pension funds.

Adding the Social Security trust fund to the list would make that three. As Warren Buffett knows, it’s really no more than a bet on the future of America. If that’s not a good bet, what is?

• This article first appeared at www.nydailynews.com

Two Days in Tennessee in 1953: A Racial Memory

Memories can last forever. This is one of my forevers, still touching me deep after 66 years.

It’s 1953 and I’m 17, a cub sports reporter for the Jamestown (NY) Post-Journal.  A close friend breaks into professional baseball down South. The paper sends me off to work up a feature story.

Come with me now to Maryville, Tennessee, to an America I never knew existed. Join me on the bus as I meet Jim Crow—up close and personal, then out the window, in this country I’d never seen before.

I don’t remember the name of the place where it happened. I just remember sitting down and the bus driver walking back and telling me to move. “You can’t sit here,” he said, “only coloreds sit back here.” It was my first time ever in the South, and already I’d broken a supreme law: Whites don’t mix with blacks. They don’t sit together on buses, they don’t drink from the same water fountains, they don’t use the same rest rooms.

Separate rest rooms and water fountains were unheard-of to me, and I had my first sighting out the bus window. There stood two fountains, starkly unequal, marked in big capital letters “WHITE” and “COLORED”. The signs laid down the rules, and they were meant to be obeyed.

When the bus driver told me to change seats, I changed seats. Just two years later, Rosa Parks made civil rights history by breaking the rules.

I love baseball, and I really loved somebody else picking up my expenses, so the rest of the trip was sweet.  I heard an echo at the end though, and you will too.

The local team, the Maryville-Alcoa Twins of the Mountain States League, sat me up in the press box like a visiting dignitary. That night I was a T.I.P., a Temporarily Important Person.

My Jamestown friend showed off his stuff: a double, a single, a fine over-the-shoulder catch. The star of the game, though, fresh on his way to a decent major league career, was the black Twins right-fielder Willie Kirkland. He hit one of his 35 home runs of the summer, and got his reward in storybook fashion. His fans threw bills over the railing and onto the field. Kirkland would later scoop up the money, turning now and then and tipping his cap.

I met him after the game, shaking hands for the first time with a major-leaguer-to-be. Afterwards my friend let me in on a secret, the echo that I mentioned earlier. Kirkland and a white girl were seeing each other, and they could lose their lives if the wrong people ever found out.

It was one of the truths I learned over those two days: bitter truths about the land of the free that nobody ever told me.

What brings it all back now, 66 years later? Actually it’s happened many times; history can hardly hit home harder than it did for me back then. In this case I had a specific memory jog, the new book Unexampled Courage: The Blinding of Sgt. Isaac Woodward and the Awakening of President Harry S. Truman and Judge J. Waties Haring, by Richard Gergel.

Woodward, a black, was a decorated war hero. In 1946, just hours after his discharge, he was pulled off a bus in South Carolina and arrested for being “disrespectful” to the driver. Seconds later, within sight of the riders still on the bus, he was blackjacked in both eyes by the local police chief. He would never see again.

Once more I was back in 1953, reliving my forever memory—and America’s too, and it’s far from over down deep.

• This article originally appeared at www.nydailynews.com 

Our Counterfeit Social Security Crisis

The humorist Mark Twain once called reports of his death “an exaggeration.” The same goes for the endless fearmongering and scare stories about America’s most popular government program, Social Security.

On the contrary, the nation’s safety net for seniors is in remarkably good shape. The trust fund holds government securities worth nearly $2.9 trillion, just under its all-time high. In 2092, at the end of the latest 75-year projection, the inflow from payroll taxes would still be covering roughly three-quarters of scheduled worker benefits—without increasing the tax rate or raising the retirement age or making any other change. That’s the truth and nothing but the truth, according to the 2018 annual report of the Social Security board of trustees.

Never let the facts get in the way of false alarms. As recently as mid-October, Senate Majority Leader Mitch McConnell (R-KY) claimed that cuts in Social Security, Medicare and Medicaid were the only way to lower the federal deficit. He urged legislators to “address the real drivers of the debt” and “adjust those programs to the demographics of America in the future.”

Just-retired House Speaker Paul Ryan (R-WI) spent his entire Congressional career pushing the same notions. He doubled down in his farewell address, calling entitlement reform (the GOP camouflage for cuts) “our greatest unfinished business.”

An inconvenient truth: since McConnell became the Senate leader in 2015—with Ryan already leading the House—the deficit has risen by 77 percent. Judge for yourself whether they’re genuine fiscal hawks or the common faux variety. Putting it another way, ask them to choose between a slimmed-down deficit and fat tax cuts for corporations and the wealthy. (Oh, right, they already did.)

Linking Social Security to the nation’s red ink is hugely misleading.  At the same time, it’s hugely true that demographic trends are continually pushing up total payouts. Sooner or later, Social Security will have to adjust to the new realities: longer life spans, more and more retirements (about 10,000 baby boomers turn 65 every day), fewer workers per beneficiary.

In 2018, for the first time since 1982, the latest numbers forced the Treasury to begin dipping into the trust fund to help pay benefits. That dipping will exhaust the fund by 2034. Unless Congress acts before then, payouts would have to be trimmed by about one-fifth.

Replacing 20 percent of benefits (or even increasing them, as Rep. John Larson (D-CT) has proposed) presents a modest fiscal challenge with several potential solutions. Most promising and most obvious: raise the payroll tax, and raise or eliminate the cap on earnings subject to the tax ($132,900 for 2019, adjusted annually for inflation). Going in the opposite direction, the shortfall could also be addressed with benefit cuts; e.g., lower payouts or a later retirement age.

While the fiscal challenge is modest, the political challenge is monumental. Reaching common ground on the right fix is all but certain to touch off an epic battle. (Make that uber-epic. The epic battle came with the last Social Security reform in 1983, back in the days of functional government.)

The coming struggle also offers a golden opportunity to resurrect the common good as the government’s overriding goal. The name itself reminds us that we’re all in this together: it’s Social Security, not Individual Security. Few laws speak as directly to our oneness as the preamble to the Social Security Act of 1935: “An act to provide for the general welfare by establishing a system of Federal old-age benefits, and by enabling the several States to make more adequate provision for aged persons, blind persons, dependent and crippled children, maternal and child welfare…”

In the spirit of ’35, House Speaker Nancy Pelosi (D-CA) and Minority Leader Kevin McCarthy (R-CA) should immediately begin negotiating Social Security’s second major overhaul. The trustees concluded their 2018 overview by urging “that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually.” It’s simple arithmetic: “Implementing changes sooner rather than later would allow more generations to share in the needed revenue increases or reductions in scheduled benefits and could preserve more trust fund reserves to help finance future benefits.”

Time is money; for Social Security reform, time is humongous amounts of money.

The 1983 changes took root in 1981, when President Reagan created the National Commission on Social Security Reform (a.k.a. the Greenspan Commission). The urgency then was far greater than it is now; when Reagan finally signed the bill, the trust fund was only three months away from wipe-out. Starting 2019, we’ve got 15 years. Even today’s sharply-divided Congress should be able to do it.

Then comes the president’s signature. If Trump is still in office, a political irony would be coming around again—a Republican president signing off on the reform of an archetypal New Deal program.

Something else would be coming around again too: rumors of Social Security’s death would turn out to be greatly exaggerated.

America’s Rigged Tax Collection System

Charges of rigging fill the air in today’s America. Elections, the economy, college admissions, the list seems endless. Whatever the truth in other cases, our tax collection system is undeniably rigged. It’s been so from the beginning, rigged against the vast majority of workers.

In 1943, under pressure to pay for World War II, Congress passed a law requiring employers to withhold taxes and report the incomes of their employees. The same law implicitly allows self-reporting by huge numbers of largely high-income taxpayers: landlords, self-employed professionals, small businesses, et al.

Tax compliance figures for the two groups differ starkly. The latest estimate from the Internal Revenue Service shows 99% compliance by wage and salary earners. Self-reporters, by contrast, are evading scores of billions in taxes year after year.

Here’s the bottom line from the IRS:

Findings from earlier tax gap analyses that compliance is higher when amounts are subject to information reporting and even higher when also subject to withholding, continue to hold….Misreporting of income amounts subject to substantial information reporting and withholding is 1 percent; of income amounts subject to substantial information reporting but not withholding, it is 7 percent; and of income amounts subject to little or no information reporting, such as nonfarm proprietor income, it is 63 percent.

Self-reporters take several forms, for example, partnerships, S corporations and limited liability companies (LLCs). They self-report via numerous avenues: business income, corporate income, self-employment taxes, credits, and more. If self-reporters have taken any capital gains in the stock market, brokerage firms are now required to report that income to the IRS. It’s the only significant instance of their income getting the same reporting treatment as wages and salaries.

The most recent IRS figures cover the period 2008-2010. Adding up all the under-reported categories, the agency estimated Treasury losses at $387 billion a year. Stunningly, self-reporters paid little more than a third of what they should have. (Really, you say? Go back to that IRS quote, and do the math for yourself.)

Here’s the agency’s summation of what it all means:

A high level of voluntary tax compliance remains critical to help ensure taxpayer faith and fairness in the tax system. Those who don’t pay what they owe ultimately shift the tax burden to those who properly meet their tax obligations. The new tax gap estimate updates long-standing research findings that information reporting and withholding are strongly associated with higher levels of voluntary compliance.

The words may be measured, the volume low—but it’s actually a primal scream with an unmistakable message. The IRS is telling Congress that self-reporting dooms the federal government to losses of about $400 billion a year. It’s also saying that America’s wage and salary workers deserve an unrigged tax collection system—everybody’s income should be reported, not just theirs.

Employers do the reporting for their employees; brokerage firms do it for stock market capital gains; let’s turn to banks to do the job for current self-reporters. Income and expenses are the major information components. Some way, somehow, those components have to be identified, separated, and added up. At year’s end, the totals should be reported to the IRS and to the income recipient. It would be nothing more (and nothing less) than a W-2 for self-reporters: the same as most American workers have been getting for decades.

If current technology isn’t up to the job, then invent technology that is. There’s nothing digital magic can’t do. If you don’t believe it, ask Siri (or better yet, Zora).

The bigger obstacle by far is political. The investment community fought relentlessly against basis reporting of capital gains. Entire other communities will do likewise to resist, demonize and delay any self-reporting reform. Listen to Bruce Bartlett in a 2012 op-ed examining, yes, the tax gap: “People don’t like the intrusion into their privacy — and the diminution of their opportunities for tax evasion — and businesses don’t like the cost or the alienation of their customers.” To which the obvious answer is: what does “liking” have to do with it?

Let’s finish with a billion-dollar idea.

The Treasury could attack that $387 billion-a-year revenue loss by inviting all techies to compete for a $1 billion prize. The goal: develop easy-to-use, non-intrusive software that eliminates the self-reporting shortfall.

The nation could wind up with the bargain of the century. The loss from under-reporting of income amounts to $1.06 billion a day. Prize-winning software could recover that amount by the first coffee break of Day Two.

And in the process, end 75 years of tax unfairness.

•  This article first appeared at www.nydailynews.com.

Tax Reform: Down with the “Stepped-Up Basis”

The term “stepped-up basis” is shorthand for a tax loophole that lines the pockets of the haves while it picks the pockets of the Treasury. According to the Congressional Budget Office, the cost over ten years could reach $644 billion.

Let’s see how the well-off get handed hundreds of billions that should be going toward the good of all Americans.

The basis of an asset (stocks, real estate, fine art, etc.) is its price or fair market value when it’s acquired. Any increase over the basis becomes a capital gain. When holders dispose of assets, they’re taxed on those gains—except when the stepped-up basis steps in, and erases both the gains and the taxes.

It’s automatic: when assets are passed along to an heir, the value at the time of the transfer becomes the heir’s basis. Magically, all the accumulated gains vanish. With no gains, all the taxes vanish too.

The basis loophole is actually one tax inequity on top of another. First, capital gains are taxed at a far lower rate than wages. When this preferential rate isn’t preferential enough, the affluent simply hold on for the zero rate.  (“This is the thrill that pulses through the veins of the well-to-do when they discover there is no longer any limit on their power to accumulate.” The words are Thomas Frank’s, taken from his latest book Rendezvous with Oblivion.

The loophole doesn’t apply to commonly-held retirement accounts such as regular IRAs and 401(k)s. Putting it another way, those hundreds of billions go lopsidedly to the wealthy—people with hugely appreciated assets, separate and apart from retirement savings.

Full disclosure: The stepped-up basis is available to just about everybody. For tax years 2018 through 2025, it’s open to individuals with a net worth up to $11.2 million or couples with a net worth up to $22.4 million.

Anybody who calls for ending a law has to counter the thinking that led to it in the first place. Proponents of the stepped-up basis claim that it’s often not possible to accurately determine the original basis, especially for assets that could date back several decades.  Our digital age has made this rationale more and more tenuous. In the large it simply doesn’t wash anymore.

In addition, Congress could always tailor a repeal to deal with holdings acquired long ago. Lawmakers faced a comparable situation in 2008, when they passed a bill requiring basis reporting for stock market capital gains. In that case they worked out various post-2008 schedules for different types of holdings. While Wall Street investors were always required to report gains honestly, the Internal Revenue Service now gets basis figures that provide a double-check. Over the long term, accurate reporting of capital gains by brokerage firms should approach the 99% level already achieved by employer reporting of workers’ wages and salaries.

Basis prices of other major assets should also be routinely reported. Realtors, for example, should be required to report to the IRS any home or property sale exceeding a specific amount; the same for major art galleries, antiques dealers and jewelers. Exceptions would be allowed; e.g., family heirlooms (provided they stay in the family and aren’t resold for tax-free gains).

The two capital gains tax inequities (the stepped-up basis and lower rates) effectively increase income inequality and perpetuate wealth over generations. For this the Treasury pays dearly: according to the Congressional Budget Office (CBO), these tax breaks are expected to cost a combined $1.984 trillion from 2014 to 2023.

The same CBO report estimated the federal deficit for that decade at $1.932 trillion (excluding interest on the national debt). So if those two tax breaks were ended—just those two—the Treasury could gain enough revenue to pay for all federal programs over that period without running a deficit. (Of course behaviors could also change, lowering the Treasury’s pick-up. Even so, the prospect should warm the hearts of all fiscal conservatives and deficit hawks.)

Eliminating both breaks likely goes a break too far. In that case, Congress should start with the most egregious. It should shut down the stepped-up basis.

Author’s Note: (Hyperlinks (where significant searching required):

1st graph, 2nd hyperlink: Table 1 p. 6/Exclusions from Taxable Income/Capital gains on assets transferred at death

5th graph: Table 2 p. 15/Tax Expenditure/Exclusions from Capital Income/Capital gains on assets transferred at death

7th graph: Scroll down to subhead Inherited IRAs and Retirement Accounts. 1st graph of that subhead

11th graph: Table 1 p. 6/Exclusions from Taxable Income/Capital gains on assets transferred at death ($644 billion) + Preferential Tax Rates on Capital Gains and Dividends ($1,340 billion, or $1.34 trillion)

Last hyperlink: Scroll well down to subhead Fiscal impact of subsidizing wealth inequality.

One Tiny Tax Reform, Millions 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 estimate from 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?

Making the Golden Years Golden for All Americans

Congress created individual retirement accounts (IRAs) in 1974. Four years later it added 401(k)s. A third variety, Roth IRAs, won approval in 1997. Together the accounts dominate America’s private retirement system.

Today we’re a hugely unequal society. Updating our private system could reduce inequality, and help make the golden years golden for all Americans.

Let’s begin with the millions of workers we’re not even giving a chance:

The 1974 bill aimed to provide a workplace retirement plan for all private-sector employees not otherwise covered. Forty-three years later over 70 million workers, mostly low- to middle-income, still lack a workplace option.

They deserve at least two. One would be a broad stock market index fund like the S&P 500. For savers who put safety first, the other would be a bond fund holding only Treasury debt. Enrollment would be automatic with an opt-out provision. Pre-tax contributions would be made via payroll deductions. Gains would accrue tax-free, taxes payable on withdrawal (the same as all current accounts except Roths).

States could set up accounts on their own (as Oregon already has), but Congress could do the job in a single stroke. Both 2008 presidential candidates, Senator John McCain (R-NV) and Barack Obama, endorsed a federal Automatic IRA plan. Obama later included the idea in a budget outline, but it never went any farther.

It should have. Well into the 21st century, private retirement accounts should be a worker’s right: they should come with the job, period.

Now let’s add more luster to the golden years with smarter retirement account rules.

Congress should lower the age for required minimum distributions (RMDs) from the current 70 1/2 to 65. That would dovetail with the Medicare eligibility age and with common sense and the common good. An aging population is putting Medicare and Social Security in a fiscal bind. Revenues from the new rule should be dedicated equally to the two programs.

Taxable required distributions aren’t a penalty; they’re a payback to the Treasury for decades of pre-tax contributions and tax-free growth. It would help all seniors if the payback started sooner. (No, RMDs won’t exhaust retiree savings. It takes voluntary withdrawals far larger than the required minimums to do that.)

Moving on to fairness, it’s important to remember that tax breaks redistribute income. Those who get them count on other taxpayers to make up the revenue shortfall (or else there’s simply less to go around). Retirement breaks flow lopsidedly to the well-off. Putting it all together, there’s a strong case for the GOP idea of a sharply lower cap on annual 401(k) contributions.

Would anyone lose any sleep if the current $18,000 maximum were cut to $10,000, to $7,500? It’s one thing to help workers who need help. It’s another to over-subsidize the retirement savings of the haves, and lose current tax revenues in the bargain.

Lastly, we should wind down a fiscal deception.

Congress should remove Roth IRAs, Roth 401(k)s and Roth rollovers (conversions of other accounts into Roths) from the retirement mix. Existing Roths should follow the rules that govern all other plans: required distributions, taxable at ordinary income rates. If that can’t happen, at least stop offering Roths and require (tax-free) distributions from current accounts.

Fiscal hawks should cheer the reform, which would guarantee lower federal deficits in future decades. Roth contributions are taxable, so the Treasury takes in more money initially. But the gains are permanently tax-free, leading to multi-billion-dollar losses in the long run (and retirement accounts are primarily about the long run).

Fairness would also get a boost. It’s inequitable to exempt Roths from required distributions and taxes on gains.

Len Burman is a tax expert and former director of the nonpartisan Tax Policy Center. In 2006, analyzing the repeal of the $100,000 income limit on Roth conversions, he called it an “especially insidious” fiscal gimmick. Roth accounts, he wrote, are a downstream disaster: “The revenue losses…are exceedingly poorly timed. They reduce federal revenues at the same time that the baby boomers are aging….[The accounts] will place a large and growing portion of the tax base off limits…just when our children and grandchildren will most need tax revenues.”

Roths were a flimflam from the beginning, “a conscious, contemptible manipulation of the budget rules;” so said John Buckley, former chief Democratic counsel to the Committee on Ways and Means. The Treasury would be billions better off without them.

Let’s use our smarts and our hearts. Let’s make retirement accounts the last, golden part of the American Dream.

P.S. In April 2012, the House Committee on Ways and Means held a hearing on tax reform and tax-advantaged retirement accounts. I filed a statement at the hearing recommending that required minimum distributions begin at age 65 instead of 70 1/2. Here’s a link to the statement.

Wealth over work, $28,684 to $1

On September 27th, media reports outlined the tax plan hammered out in secret by the GOP’s so-called Big Six. The morning of the 28th, the writer Stephen King tweeted his scorn: “Same old same old. The fat man’s busy dancing while the poor man pays the band.”

The poor man doesn’t really pay the band, but there’s plenty of reason to second King’s emotion.

The proposals reaffirm the Republican obsession with shoving more money into the pockets of people whose pockets are already bulging. The haves, and only the haves, would reap billions by repealing the alternative minimum tax and the estate tax. More would go in the same direction by taxing the income of pass-through businesses at 25 percent.

Worst of all, the proposals make not even a gesture toward eliminating the biggest single contributor to income inequality in America: lower taxes on income from wealth than income from work. Income made sitting by the side of the pool (capital gains and dividends) gets taxed at a lower rate than income from wages. For taxpayers in the top bracket, the preferential rate amounts to a break of roughly 40 percent (23.8 percent on investment income vs. the top marginal rate of 39.6 percent on ordinary income). The tax break for the everyday well-off is even greater, 15 percent vs. 28 percent, a savings of over 46 percent.

Candidate Trump promised a big gesture, ending the carried interest loophole that lets hedge fund managers mislabel their income as capital gains.  They’re “getting away with murder,” he said. They are, and the crime pays big-time.

It’s true, of course, that the rich hand over by far the biggest share of individual income taxes in America. It’s also true that an ever-greater portion of their income flows from wealth rather than work. That means a major tax break on ever-more billions: driving up the net incomes of the super-rich and the merely rich, driving up inequality, pushing effective tax rates on the upper reaches so low that Warren Buffett says his office workers pay at a higher effective rate than he does.

It also means that work is taxed more than it should be, or that wealth is taxed too little, or both. Steven M. Rosenthal, a senior fellow at the Tax Policy Center, frames the issue starkly: “We’re taxing the rich much too lightly because we tax capital so much less than labor.”

Trump is a golden example of who strikes gold under the GOP plan. Bloomberg News denounced “The Trump Tax Reform’s Pass-Through Boondoggle,” calling it “a great deal for the Donald Trumps…of the world.” Leaked pages from the president’s old tax returns show that he paid an alternative minimum tax of $31 million in 2005—a tax he now wants to repeal. The Trump family, of course, would benefit “yugely” if the estate tax gets the ax.

Tax expert and author David Cay Johnston founded a news service to focus on “what the President and Congress DO, not what they SAY.” In an article on that website, Johnston showed what happens (and what presidents and Congresses knew would happen) when tax policy favors wealth over work. He used IRS data to compare “the very highest income Americans in 1961 and 2013 with the vast majority, the 90%.”

His calculations may surprise taxpayers of all incomes:  in real terms, adjusting for inflation, effective rates have dropped sharply over those 52 years. The 90% paid an average 9.6 cents out of every dollar in 1961, but only 7.6 cents in 2013. The 400 richest paid 22.9 cents in 2013 compared to 42.4 cents in 1961.

“That’s a rate cut of 19.5 cents per dollar,” Johnston wrote, “that’s almost 10 times as large a tax-rate cut applied to a lot more dollars.” It lifted the 2013 tax savings for the super-rich to an average of $51.6 million.

The gusher came after-tax.  Comparing 2013 to 1961, the income of the top 400 rose on average by $195.4 million. For the 90%, the average rise was $6,812. “Now here comes the…ratio that may take your breath away. For each dollar of increased after-tax income enjoyed by the vast majority in 2013, the top 400 enjoyed $28,684 more. That’s $28,684 to $1.” (The ratio was even greater with Social Security taxes factored in.)

Trump’s proposed tax cuts are now masquerading as GDP growth hormones. Modest cuts, if any, are being touted as a middle-class bonanza. The real bonanza will stream even more to wealth, not work.

$28,684 to $1. And the GOP wants more.

Magic Money Working Magic on 401(k)s

A top policy expert isn’t buying reports of a private-sector retirement “crisis.”  In an article, Andrew Biggs not only rejected the gloom but offered a striking counter-narrative. He cited figures showing that 401(k) defined contribution accounts, while regularly maligned, are doing better by workers than the defined benefit plans they swept aside.

His numbers speak to the power of magic money: savings built up in large part by stock market investments, compounded by decades of tax-sheltered capital gains and dividends. The most fortunate retirees are having their cake and eating it too. They’re taking annual distributions from their accounts, and having the withdrawals more than replaced by new magic money streaming in (full disclosure: the author is among the most fortunate).

Let’s review some of the key figures, and see how 401(k)s and similar defined contribution accounts are making the golden years more golden for millions of retirees.

First, defined contribution plans cover a far greater proportion of workers. “Participation is higher in 401(k)s, with 61 percent of private sector workers participating according to a Social Security Administration analysis, versus a peak of 39 percent for defined benefit plans.” The percentages underscore a truth commonly ignored by defined benefit advocates: the vast majority of non-government workers never had such plans, and likely never would.

Current retirement savings also far exceed the comparable figures for the years when only traditional pensions existed. Federal Reserve data show that total savings in employer-sponsored plans rose from 27 percent of gross domestic product (GDP) in 1947 to a peak of 57 percent in 1975. But, Biggs points out, “in the four decades since 401(k)s were introduced, total retirement savings nearly tripled to 157 percent of GDP.”

Other yardsticks yield equally compelling results (thanks partly, of course, to magic money).

For example, a 2017 study by economists from the IRS and the Investment Company Institute put the income of the median retiree at 103 percent of what they were making prior to retirement, “far exceeding the 70 percent ‘replacement rate’ that most financial advisors recommend.”

Workers appear to be getting a better deal even without any magic. Vesting periods are shorter, and company contributions have soared; according to the Labor Department, employer deposits to private-sector plans “more than tripled as a percentage of salaries since 1975.”

With so many signs flashing positives, why all the negatives for 401(k)s? Why are they disparaged as a backward step?

There’s good reason. Defined contribution plans effectively lift the pension burden from employers and put it on employees instead. They offer little to no security. The stock market, where most 401(k) money heads, is notoriously volatile. Inevitably, unnervingly, Wall Street hits stretches when the averages slide deep into the red.

But there’s an inverse inevitability as well, and it gets little attention: the inevitability of market recoveries, often speedy recoveries.

MarketWatch analyzed selloffs and recoveries from 2010 to September 2015. The declines averaged 26 trading days to bottom out, an equal 26 days to recover; the median did even better, recovering from a 19-day drop in just 15 days.  Wealthfront looked at down markets from 1965-2014; over those fifty years, all the declines of less than 10 percent “bounced almost instantly.”

Uber-crashes are inevitable too. In the latest, from June 2008 to March 2009, the financial crisis took all three major indices to 12-year lows. Then began the recovery: the S&P 500 finished 2009 up 64.83 percent from its low, the NASDAQ up 78.87 percent, the Dow-Jones 59.28 percent. As it happens, the rebound was also the start of what’s become the second-longest bull market in the last 85 years.

There are two morals to this retirement story. First, based on the record, defined contribution accounts deserve more cheers than jeers. Second, magic money really is working magic, enriching both current and future retirees.

Over the long run it’ll do lots more enriching. It’s almost, well, inevitable.

Note:1

  1. For stocks, mutual funds and bonds…Congress now requires brokerages to report the basis of these investments, a reform wrought partly after my reporting on this issue and the work of others, including Gerald Scorse, who pressed this issue with lawmakers.” – pp. 271-2 of the David Cay Johnston book, The Fine Print.