Tag Archives: taxes

President Obama’s Fiscal Cliff and 401(k)s

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Are our 401(k)s at risk from the Obama Fiscal Cliff?  To the extent that they are (and I don’t know that they are), consider some ramifications.  Here’s one way such a risk might unroll:

The Bipartisan Policy Center’s Debt Reduction Task Force has one way to help fix the deficit: reduce 401(k) contributions by 64% using a 20/20 Cap.  Under the 20/20 Cap, contributions would be limited to the lesser of 20% of pay or $20,000 a year.  All those pretax dollars designated for retirement will now be taxable income and Treasury will fill with additional tax revenues.

I’ll leave aside BPC‘s cynical assumption that our money actually belongs to the government, that they’re somehow entitled to it (now there’s an entitlement program…).  Here are a couple of those ramifications.

A single employee who earns $60,000 per year can contribute $17,500 to a 401(k) in 2013.

After taking the personal exemption and the standard deduction, the single employee would be in the 15% federal tax bracket. Under the 20/20 Cap, assuming the 401(k) has a 4% match, the same single employee earning $60,000 per year would be limited to a $9,600 401(k) contribution and will now be in the 25% federal tax bracket paying $1,700 more in taxes.

It’s true that those $17.5k represent 29% of his income, but with disciplined budgeting (he’s single, recall) it’s not so far-fetched.  He will be stretched, but getting hit with an additional $1,700 in taxes will hurt—possibly to the point of blowing up his retirement plans.

With a 64% reduction in contributions, many small businesses may terminate their plans–forcing employees to save money on their own.  After all, why pay plan fees and other administrative costs if the amount of income that can be deferred is reduced to basically the amount of an IRA contribution?

Indeed.  I was chairman of my employer’s 401(k) Plan Board of Trustees a number of years ago.  For our 25-employee company, the typical fee for that sized plan ran to $20,000.  Which is why we had a Board of Trustees and ran our own Plan.  Have the fees changed all that much since?

There’s one more, though, with serious long-range implications.  Reduced contributions to our (private) 401(k) plans while we’re working means a smaller nest egg when we retire.  Which means greater dependence on a Social Security System that will be bankrupt by that day.  Which means both we’re being a greater burden on our fellows in our retirement and we’re living much more poorly than we would have had we been able to accumulate a larger nest egg.

Here’s an example, of just 10 years’ duration.  My wife, being older than 50, is able to contribute, presently, $23,000 per year beginning in 2013.  With the 20/20 cap, that would drop to $20,000 per year.  Note that I’m assuming no changes over the 10 years—including in tax treatment and limit increases.  I’m also assuming a 4% real (after inflation) return on 401(k) investments.

After 10 years, that higher contribution rate will have produced a nest egg of a bit over $276,000, while the limited contribution rate will have grown only to a skosh (that’s the technical term) over $240,000.  That’s a 13% reduction in the value of our nest eggs from such a cap.  Blow that up over 20 years—yes, this contribution rate is possible; you’re in your mid-40s and entering your peak earning years at 20 years prior to retirement.  That nearly 13% annual shortfall only expands the deficiency of the capped 401(k)’s outcome—now it’s nearly $89,500, some 150% greater, short by more than four years’ worth of capped contributions.

Some Outcomes of the Obama Fiscal Cliff

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Sudeep Reddy described, in a recent Wall Street Journal op-ed, a few that will occur in the coming year.

  • Jan 1: New provisions take effect including higher payroll taxes, income taxes and investment taxes.

In truth, the payroll tax “holiday” was an act of monumental stupidity by both parties—but then I repeat myself.  With Social Security already nearing bankruptcy (the timing works out to just a Presidential election cycle or two from today), reduce the funding for it by nearly a sixth.  Yeah.

The payroll tax cut also points up the dishonesty of the Progressives in Congress and in the White House.  President Barack Obama, for instance, is on record as saying that such a cut in Americans’ taxes is good for all Americans.  Indeed, he’s gone so far as to propose boosting it to 3% and including businesses by proposing a 3% cut in their side of the payroll taxes.  Yet he, and his fellow Progressives, refuse to consider making those 3% an income tax cut and making the reduction permanent.

  • Jan 2: $110 billion in spending cuts scheduled to begin, hitting domestic and military spending.

This is as inevitable as Obama can make it.  Enormous defense cuts have been a Progressive dream for 50 years.

  • Late February, early March: the US is expected to reach its congressionally mandated borrowing limit.
  • March 27: A deal to fund the federal government expires.
  • Mid-2013: If Congress crafts a two-step deal to avert the fiscal cliff, this could be the deadline for tackling part two, including any unresolved tax and entitlement issues.

The tax and entitlement “issues” are already settled.  Senator Chuck Schumer (D, NY), et al., has already said that there are no entitlement issues; entitlements are not to be cut; they’re not even to be discussed.  Period.  Moreover, Obama has already said he’ll veto any bill that doesn’t include tax rate increases (his latest “flexibility” on that item is just eye-wash for the chattering classes.  That’s clear from his “stopgap” proposal: let taxes rise for those above his originally demand demanded threshold—$200k/$250k.)  The tax question already has been resolved in another way, too: Obama gets his tax rate increases in the absence of a deal.

Progressive Cooperation and the Fiscal Cliff

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In last weekend’s interview with NBC‘s “Meet the Press,” President Barack Obama said this with a straight face, according to The Wall Street Journal:

Singling out the two GOP legislative leaders, House Speaker John Boehner of Ohio and Mr [Mitch] McConnell of Kentucky, the president added that “Congress has not been able to get this stuff done.” The reason, he said, is “not because Democrats in Congress don’t want to go ahead and cooperate, but because I think it’s been very hard for Speaker Boehner and Republican leader McConnell to accept the fact that taxes on the wealthiest Americans should go up a little bit, as part of an overall deficit reduction package.”

Really?  Based on what theory must “taxes on the wealthiest Americans…go up a little bit?”  The revenues collected won’t amount to walking around money compared to your budget deficits.

Democrats want to cooperate?  What was the Senate vote on the fiscal cliff spending solution (albeit for only six months) which the House passed last September?

What were the vote outcomes on the Federal budgets the House passed each of the last two years?

What were the Senate votes on any of the 40, or so, jobs-related bills passed by the House and sent up to the Senate in this Congressional session?

What were the deficits contained in your own budget proposals which you sent to Congress in each of the last three years?  Oh, wait—most of the Democrats (yourself, only, excluded) did cooperate on these: you couldn’t even get a single vote, Democrat or Republican, on any of those “budgets.”

Where are your Democrats on entitlement reform or on spending cuts—real ones, now, not reductions in growth rates that you masquerade as cuts, to occur some time in a nebulous future?

What was it you threatened to do in your 2013 inaugural and State of the Union speeches if you don’t get your way on taxes?  Oh, yeah.  You said

[you] would use [your] inaugural address and [your] State of the Union speech to tell the country the Republicans were at fault.

You berate Republicans for acting against 98% of Americans by holding out for no tax increase on the remaining 2%.  Yet you’re ready—anxious—to blow up our economy and gravely harm honest, hard-working Americans because, having already gotten 98% of what you claim you want, You’re greedy and want more.  Where’s your cooperation?

Where is any Democrat’s cooperation, Mr Obama?  You’ve offered no evidence to support your assertion.

The Obama Fiscal Cliff

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Here is a table of the effects of the Obama tax increases that will follow from President Barack Obama’s drive to put us all over the fiscal cliff.  The data are compiled from a recent Wall Street Journal article.

Category

Income

Post-Cliff Tax Rate

Tax Rate Increase from Pre-Cliff

Tax Dollar Increase from Pre-Cliff

Remarks
Unemployed Person Under $10,000 8.4% 55% $159
College Student $10,000-$20,000 7.5% 38% $308
Lower-Income Working Couple $20,000 – $30,000 5.5% 9,809% $1,423 From $15 refund to $1,423 tax payment—loss of Bush tax cut 10% bracket
Retiree Household $30,000 – $40,000 5.1% 42% $540
Higher-Income Professional $150,000 25% 25% $6,662 This also represents just under 25% of the total increase from the Obama tax hike
High-Income Couple $350,000 29% 20% $13,847 Loss of the AMT and higher dividend and cap gains taxes
Very High Income Households $1,000,000+ 39.7% 24% $254,637 Total share income taxes paid by these earners actually goes down due to the disparate impact of the Obama tax increase on the lower incomes

Obama’s Plan B desire for going over the fiscal cliff is going to hurt the least among us—the antithesis of our country’s Judeo-Christian imperative—and it makes his Evil Rich relatively better off.

Good Faith Negotiations

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Here’s another example of good faith, Progressive style.  This occurred in the failed fiscal cliff “negotiations:”

At one point, according to notes taken by a participant, Mr Boehner told the president, “I put $800 billion [in tax revenue] on the table.  What do I get for that?”

“You get nothing,” the president said.  “I get that for free.”

It’s certainly true that a number of chuckleheads, as one Republican participant called them, let themselves be confused into thinking that voting to preserve the present tax rates for 99.8% of Americans was the same as voting for a tax increase—even though the Great Grover Norquist had given permission for such a vote.

But the fact is, that President Barack Obama has been discussing in bad faith all along: he wants the cliff.  With the cliff, he gets tax rate increases all across the board, he gets to gut Defense spending, and he gets to blame Republicans for the economic and security disaster that will result—all Progressive dreams.  And that blame is as important to Obama’s ego as are the tax increases and the Defense cuts.

It is unfortunate that the GOP has chosen to be complicit in this shameful affair, but there it is.  They’ve emasculated themselves with an idiotic civil war, and they’ve rendered themselves impotent for the next two years.  Look for the Progressives to retain control of the Senate and regain control of the House in 2014, and to retain the White House in 2016.

Had the Republicans been able to pass Plan B in the House, those chuckleheads would have achieved three things: they would have voted for the present tax rates for nearly all Americans, they would have put the onus on the Progressives—as Speaker of the House John Boehnor (R, OH) put it

[T]he president will have a decision to make.  He can call on the Senate Democrats to pass that bill, or he can be responsible for the largest tax increase in American history

—to come up with an honest counterproposal.  And put the failure of the negotiations squarely on the shoulders of the Progressives in the Senate and the White House.

Now, Republicans don’t have anything at all for the debt ceiling debate other than an understanding of how to fail.

Congratulations, guys.