Income Taxes and Retirement Savings

Professor Benjamin Harris (Kellogg School of Management) made a case for redoing our 401(k) retirement savings system.  He had several good points, too: the tax break today compared to the taxes due on withdrawal during retirement’s usually lower tax rate is irrelevant to those whose current income is low enough to go untaxed or not taxed much.  Contributions are tax deductions vs tax credits equal to a portion of contributions.  The whole system is complex from a tax-figuring perspective (what are the tax brackets in play for a particular saver, what taxes will be in play when the saver retires, how will investments perform in the interim).

Overlooked, though, is a larger alternative, even if it is a more difficult alternative to achieve.  It’s far from impossible to achieve; this year’s tax reform and cuts represent a major step in this direction.

The whole complexity of the tax question, along with most of the tax question itself, would disappear with a low, flat income tax rate.

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