Is Congress Getting Ready to Eliminate the Tax Benefit of the 401(k)?

So, Washington is pretty much a Democratic town these days.  The name of this site is the  CAPITALIST, so you can probably guess that I'm leery of too much government in anything in my life.  Still, I'm willing to be open minded about most things and give ideas a chance.

But, history has a way of showing that whenever the Democrats or the Republicans hold both houses and the White House, over-reaching the mandate given by the people is usually right around the corner.

For example, would you believe that eliminating the 401k Tax Benefit for employees is under consideration in the newly blue Washington?

From the Philadelphia Bulletin:

"Congressional Democrats might enact legislation taxing 401(k) plans if they obtain a supermajority in Congress after the next election. They have shown an interest in revamping the current system and in eliminating the current tax exclusion from contributions.

During the past two weeks, U.S. Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee and U.S. Rep. Jim McDermott, D-Wash., chairman of the House Ways and Means Committee's Subcommittee on Income Security and Family Support have entertained proposals that would tax 401(k) plans.

Both held hearings laying the groundwork for future legislation that could eliminate most of the $80 billion in annual tax breaks that investors receive by placing their money in the $3 trillion 401(k) system. The plan, which may serve as a model for this change, is by Prof. Teresa Ghilarducci, professor of economic-policy analysis at the New School for Social Research in New York. It is similar in ways to some European systems.

"Actually there are two plans, said Prof. Ghilarducci, "a short-term one and a long-term one. As part of the bailout, I would include a provision for individuals to be able to swap their 401(k)s at its August 2008 value for special issue government bonds paying 3 percent plus inflation."  Her long-term plan is to rethink the concept of 401(k)s and eliminate the tax deductibility of contributions to them. For example, she said, a person making $40,000 per year who contributes 5 percent of their income to a 401(k) currently receives a tax savings of $560.

For a person making $60,000, who contributes 5 percent of their income to a 401(k), they would have a tax savings of $900. She is proposing that the tax subsidy is eliminated completely. In its place everyone gets a $600 federal income tax credit. This would benefit those who make less.

But in the case of the aforementioned example, while people making $40,000 a year would see a net gain; people earning $60,000 per year would experience a net loss.  A tax increase by Democrats on those making $60,000 per year would not be in line with the  presidential nominee U.S. Sen. Barack Obama's pledge to only increase taxes on those making $250,000 per year."

Wow.  There are two things beyond increasing Federal payroll taxes on normal people that the Democrats could do to ensure Republicans take back seats in Congress in 2010 and 2012.  One is to eliminate or limit the tax benefit for interest payments on mortgages.  The other is workplace related, and that's to eliminate the tax benefit of the 401(k). 

The definition of over-reaching.  Surely that wouldn't happen, would it?  Wow.

Comments

[RutgersFan]

Kris,

Thanks for the good post. I, too, saw this article about two weeks ago and I'm a bit surprised that your post is the first response I've heard to it.

I agree that this would be a bad move by the now almost-controlling party. This would anger both business and a large segment of the population.

Only time will tell, I suppose. Add this to the list with the EFCA, RESPECT and Paycheck Fairness Act, only with farther-reaching consequences.

Thanks for keeping us on the cutting edge!