Most of my clients are “One Percenters.” At the risk of inciting an “Occupy Three Forest Plaza” protest, I admit that I may even qualify as a One Percenter, if you smudge the dividing line a bit. So, I’ve got dogs in the fight about tax reform. A recent Congressional Research Service (“CRS”) study bothers me; so does a House Ways and Means Committee hearing held last week, but not quite as much. The United States needs to narrow significantly the gap between its expenditures and its revenues. Sometimes, it seems that Washington and Warren Buffet want to close that divide by standing only on the shoulders of those vile One Percenters. The first item aims squarely at One Percenters. The second item brushes a lot more broadly. That’s the reason I am not so concerned – a lot more voters could be affected.
The CRS report issued this month addresses the amount of tax revenue “lost” because pass-through entities – generally partnerships and Subchapter S corporations – do not pay Federal income tax. Thus, the income is only taxed once, as compared to two levels of tax on income of C corporations – one tax at the corporate level and another tax on the dividends received by shareholders of C corporations. I think “lost” is dubious description of the situation. To constitute a “loss,” one must start with the assumption that double taxation of income is an appropriate economic phenomenon – an assumption not shared by a number of economists and some sovereign entities. Possibly, “tax revenues extorted” is a better description.
The report concludes that over 82% of net pass-through income is “earned” by taxpayers with an adjusted gross income of over $100,000 (“rich people”). Several lawmakers and the Obama Administration have proposed taxing large pass-throughs as corporations. Thus, the reasoning goes that, for the most part, only rich folks are hurt by the proposal. The tortured reasoning continues that “double-tax entities” are at a competitive disadvantage compared to “single-tax entities.” Yes, the cost of capital may be a bit different, but I am not buying the argument that you should handicap the more efficient fiscal arrangement to give the less efficient structure a break.
On April 17, 2012, the Ways and Means Committee held hearings about retirement savings. In preparation for that hearing, the staff of the Joint Committee on Taxation released on April 13, 2012, a document examining the present law and background relating to the tax treatment of retirement savings. It is actually a nice explanation of the existing array of retirement savings plans, focusing mostly on defined contribution plans, such as 401(k) plans, and Individual Retirement Arrangements (“IRAs”). After reading the JCT document before the hearings, some Washington observers concluded that one of the things that would be under consideration at the hearings would be the repeal of the current allowance of most workers to make “pre-tax” contributions to 401(k) plans and IRAs. These “breaks” would cost the U.S. over $460 billion in the next five years.
Witnesses at the hearing pointed out that these pre-tax earnings going into retirement savings are not exempt from taxation. Taxes are deferred and paid when the retirement savings are withdrawn (albeit at possibly a lower tax rate). In this election year, there was bi-partisan agreement to kick the can down the road; maybe deferrals and economic reality aren’t so bad.
I suppose that I sound a bit testy today. I (or actually Mrs. Maultsby), too, had to write a big check to the U.S. Treasury last week; I felt the pain.