Someone should tell Sen Sanders and Sen Whitehouse that IRC relative to tax- favored retirement plans greatly limits benefits to the upper middle class let alone the wealthy. There are no massive tax breaks for the 1% and certainly not billionaires. I suspect you would be hard pressed to find a billionaire who cares about or is even eligible for a 401k plan.
It takes an income of about $650,000 to be in the top 1%. Keep in mind, the compensation limit for determining contributions to a 401k plan is $330,000. You can’t contribute a percentage of your income above those earnings. In addition, there are limits on the dollar amount that can be contributed. There are also limits on IRA contributions.
The claims of a rigged tax code subsidizing the retirement of billionaires is nonsensical political rhetoric.
GAO’s analysis of Survey of Consumer Finances (SCF) data on households 51 to 64 found high-income households also contributed a larger percentage of their pay than low-income households (about 8% compared to 5%) and received larger employer contributions.
“The same Republican politicians who support cutting Social Security have no problem providing massive tax breaks to subsidize the retirement accounts of the top one percent.”Sen. Bernie Sanders (I-VT)
The report, titled “Retirement Account Disparities Have Increased by Income and Persisted by Race Over Time,” also highlights the huge portion of Americans who lack any retirement savings at all. As of 2019, nine in 10 of the lowest-income older households had no savings in a retirement account. In fact, the share of the lowest-income households with any retirement account balance decreased from 21% in 2007 to about 10% in 2019.
“At a time when half of older Americans have no retirement savings at all, it is unacceptable that taxpayers are forced to spend billions of dollars subsidizing the retirement accounts of the wealthiest people in America,” said Sanders. “The same Republican politicians who support cutting Social Security have no problem providing massive tax breaks to subsidize the retirement accounts of the top one percent. In America today, 55% of seniors are trying to survive on less than $25,000 a year. Given that reality, our job is to make sure that the working class in our country are able to retire with the dignity and the respect that they deserve, not to provide more tax breaks to the billionaire class.”
In a July 28 press release from the U.S. Senate Committee on the Budget, Sen. Whitehouse lamented the GAO findings that millions of Americans are retiring with no savings.
“Our rigged tax code is subsidizing the retirement of billionaires and leaving everyone else to foot the bill. As a result, wealthy households have nine times more saved than the average middle-class household, and just 10% of the lowest-income families have anything saved at all,” Whitehouse said. “Auto-enrollment in workplace retirement accounts would reduce the access gap and make it easier to save, but we must also protect Social Security for all and ensure the wealthy pay their fair share so that all can retire with financial security.”
Source: 401k Specialist https://401kspecialistmag.com/divide-doubles-between-high-low-income-worker-retirement-account-balances/?utm_source=HTML&utm_medium=email&utm_id=1876311904&utm_term=Fiduciary&utm_content=600f4d0247bb037cc38bc824
It should come as no surprise to anyone that the higher income a person or family has the greater ability they have to save, the less they need tax advantages which is exactly why the IRC code limits their benefits.
The disparity in retirement savings by income levels has nothing to do with the IRC or billionaires.
The correct comparison of retirement income is not dollar amounts, but the percentage of pre-retirement income replaced in retirement in which case Social Security provides an advantage to modest and low income retirees.
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I always enjoy your tax commentary, even if have some differing opinions in some areas. I do believe that too much inequality can be a bad thing. I also believe that a lot of the .01% have benefited from historically low corporate tax rates, which makes their overall tax rate much cheaper than many upper middle class salary earners. I don’t think we should return to the 91 percent income tax rates of the 1950’s, but I do think there is room to make some fair changes to the tax code to bring it back closer to historic norms. This also includes emphasis on enforcing existing tax laws, which hopefully will happen as the Inflation Reduction Act is implemented with the increased funding for the IRS. It is estimate that the US government loses hundred of billions of tax revenue per year due to lack of resources to enforce existing laws.
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The thing is the IRS data show the greatest area of tax cheating is NOT the billionaires or super wealthy who rather look for every possible way the tax code can benefit them – as we all do, the tax cheats are those who deal in cash businesses or cash pay. In other words, the little guy. While the dollars involved may be different – 40% of unreported tips for example, to me the principle is the same.
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It is logical that there are less billionaire tax cheats than normal income tax cheats, as you point out, because there are just not that many billionaires. But in terms of actual revenue, the enormous lost revenue from the super rich tax cheaters is much more damaging to our country than the little guy. It is morally wrong for all tax cheats – I agree with you – ,but on a practical level, I would much prefer that the IRS use its limited resources on high value tax cheats than going after low value tax cheats. And perhaps it is indeed a shade more wrong for a billionaire to cheat the government out of taxes that a minimum wage waitress not reporting tips.
But I do know that tax compliance percentage has declined significantly in the US, mostly due to Republican efforts to defund the IRS, and it has definitely added to our national debt significantly, in addition to all the unpaid tax cuts. You could make the argument that if had kept the same tax compliance rate and same tax rates from the 60’s, the US National Debt might not be the issue that it is today.
The wealthiest 1% of Americans are responsible for more than $160bn of lost tax revenue each year, according to a new report from the US treasury.
https://home.treasury.gov/news/featured-stories/the-case-for-a-robust-attack-on-the-tax-gap
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I read this and many other articles. None of them indicate tax cheating – breaking the law in large numbers. The fact a billionaire like Bezos cannot pay income tax is a reflection of the fact he had no income. It is “income tax” after all. One article I just read claimed a method the rich use to avoid taxes was investing. Really? What is a Roth IRA. Legal tax avoidance is not cheating, using the tax code to one’s advantage is not cheating IMO. The problem lies in the system of taxation not in cheating. It’s simply too complicated. If I invest in a stock and it grows in value a thousand times, but I have not used any of the growth in value and therefore gained no benefit should I pay tax on that – which of course can easily disappear.
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When I read the article, my understanding of the term “underreporting income” meant actual tax cheating. And the graph does show that the highest percentage of lost revenue to be by the top one percent. I do not consider investing or playing by the rules to be cheating on taxes. And I agree with you that the tax code is far too complicated. I think one possible tweak that might fairly address the dilemma in how to tax wealth in terms of unrealized capital gains would be to keep the original cost basis of shares and property upon death for amounts over a certain high figure that is inflation adjusted. But like you, I definitely don’t consider “investing” cheating. If that is true, call me a big cheater LOL
As for actual tax cheating, I really enjoy investigate journalism by sites like ProPublica. They had a really good recent article about billionaires that received tens of millions dollars in tax breaks for donating property to the city for use as public parks or museums, etc, but then continuing to live there and only making it available to the public 11-12 on Thursdays. That is more in line with the kind of compliance enforcement that I am seeking, not the populist rhetoric of Bernie Sanders about billionaires who are following the rules. BTW, on a side note, there actually is an organization of billionaires that is pleading with Congress to raise their effective tax rate, which is also interesting.
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I read it again and it seems to me more of a political piece than objective analysis and it’s from Treasury not the IRS. I have no doubt there are tax cheats from top to bottom, but we should confuse outright cheating and to evasion with leveraging the complexity and ambiguity in the IRC. A billionaire may seek to avoid millions while a waitress doesn’t report $.40 of every dollar in tips.
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Well I certainly appreciate you taking a look at the article and I value your feedback. I think our views on most items are aligned, i.e. I agree with you that taking advantage of the ambiguity and unnecessary complexity of the code is not cheating. The only area of doubt remains how much actual honest to goodness tax evasion goes on, and how much revenue is being lost due to that? I don’t any firm statistics on hand beyond the referenced Treasury estimate. But perhaps it would be a great idea of a future blog post once I have more data! In any case, as always, thank you for keeping these important issues in the public eye with your writing.
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This is not a problem that I have so I might have some of my fact wrong, so forgive me.
I contributed to my 401K plan for several reasons. One of which was the tax break at the time of contribution which allowed me to save more money for retirement and still be able to feed my family. In my 20’s, I didn’t have a crystal ball and had no idea how much I would save or what I would be earning before retirement. I started out at contributing 3% and finished working saving 15% and maxing out my contributions for the last few years. I knew that I would being paying ordinary income tax rates when I withdrew the 401k money and I was in the 22% tax bracket at retirement. I was always told that I would be at a lower tax bracket in retirement too. I am not. The 22% racket is a very wide range.
My first full year of retirement, I realized that if I had invested more money in the market outside of IRAs and 401Ks, I would only have to pay 15% capital gains tax at the federal level. 20% rate if I was really rich. But, in my early years I couldn’t do that and never gave it a thought when I could, for retirement purposes at least. But I did make some other investments later in my working career outside of my 401K.
I can’t imagine any one who is upper middleclass or a billionaire who has not already been told this by their tax accountants. If you are subject to the max 37% income tax rate, why, even if you could put money into an IRA or 401K, would you want to be taxed at that 37% rate at withdraw when if you invested in the market out right, you are only subject to a maximum federal capital gain tax rate of 20% for that same money. People figure out really fast how to save 17% in taxes. This is just vilifying the rich and pushing socialism.
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I’m still in the same tax bracket. I thought the big advantage was compounding interest tax deferred. If the creek don’t rise, its all going to kids and grandkids anyway.
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Speaking of which, I have an investment account, mostly index funds, with my local bank which is continually growing because I have automatic monthly deposits.
But I haven’t added to or withdrawn from my IRA for years. (RMDs transfer to a taxable account at the same bank, still index funds.) My total IRA funds are still about 8 percent below the high in Nov. 2021. Is that normal?
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