House Republican tax and retirement policy proposals
The Republicans in the House of Representatives, led by House Speaker Ryan (R-WI), are producing a series of policy proposals on critical issues, including, among others, tax reform and (as a sub-part of proposals on “Poverty, Opportunity, and Upward Mobility”) retirement security.
We recently posted an article on the Presidential candidates’ tax reform proposals. The House Republicans’ proposals are, arguably, just as relevant. Unless the Democrats take back the House, whoever wins the Presidency will still have to deal with (for the most part) the same policymakers who put together these (House Republican) proposals.
Lower tax rates
The House Republican tax proposal would lower taxes on personal income and investment income, as follows:
Current Law Tax Rates
House Republicans Proposed Personal Income Tax Rates
House Republicans Proposed Investment Income Tax Rates
For this purpose, “investment income” includes capital gains, dividends and interest income.
The House Republicans also propose eliminating the 3.8% Medicare tax on net investment income (as part of a general repeal of the Affordable Care Act).
A lower, territorial, consumption-based corporate tax
The House Republicans would change the current corporate tax to a “destination-based cash flow” system, under which, generally:
The corporate tax rate would be lowered to 20 percent.
Capital investments could be immediately written off.
Interest could no longer be deducted.
The (20%) tax would be imposed based on the location of consumption rather than the location of production – a “destination-based” system. Under this system, generally, business imports would be taxed (because they are “consumed” in the US) and business exports would not be taxed (because they are “consumed” outside the US). This approach functions in many ways like a value-added tax, except that under it (and unlike the typical VAT) payroll is deductible.
Tax incentives for savings
Finally, according to the document produced by the House Republicans:
The Committee on Ways and Means will explore the creation of more general savings vehicles, using as a model the retirement accounts that have proven so successful. Universal Savings Accounts have been proposed by many people over the years as a way to eliminate the double taxation of savings and investment for families …. These are accounts to which individuals could contribute cash and over which they would have full control of investment decisions. Account holders could withdraw both contributions and earnings at any time, and for any reason, without penalty.
This Blueprint will continue the current tax incentives for savings. The Committee on Ways and Means will work to consolidate and reform the multiple different retirement savings provisions in the current tax code to provide effective and efficient incentives for savings and investment.
There are two themes here. First, it appears that House Republicans have not given up on the idea of exempting all savings (and not just retirement savings) from taxation, presumably along the lines of the Bush Administration’s Lifetime Savings Account proposal. And second, the House Republicans would like to, at least, consolidate the current patchwork of retirement savings tax incentives (under, e.g., Tax Code sections 401(k), 403(b) and 457).
Moving towards a consumption tax
All of these proposals – reduced taxation of investment income, a “destination-based” (i.e., consumption based) corporate tax and tax incentives for saving – point in the direction of a consumption tax (with consumption defined as income minus savings and investment). The document the House Republicans produced includes an Appendix (“Tax Reform Concepts And Economic Growth”) that appears to broadly endorse a consumption tax concept; it includes, for instance, the sentence: “Consumption-based tax systems are widely regarded to be more pro-growth than income-based tax systems.”
The significance (for retirement plan sponsors) of the House Republicans’ endorsement of this over-arching concept is that under a consumption tax, generally, savings of any kind are not taxed – hence the Universal Savings Account proposal that will be “explored” by the Ways and Means Committee. It’s unclear, in such a system, why there would be any special tax incentives for retirement savings and, e.g., employer sponsored retirement plans.
Other retirement policy issues
The House Republicans’ document on “Poverty, Opportunity, and Upward Mobility” includes a section on “Building Retirement Security through the Private Retirement System.” This document advocates that Congress:
Prevent a taxpayer bailout of the PBGC: The House Republican proposal on this issue does not draw a clear distinction between the financial condition of the single-employer and multiemployer PBGC programs, describing the PBGC “federal backstop” generally as still facing “huge deficits” and stating that “PBGC’s financial crisis poses a grave risk to taxpayers and undermines the retirement security of all workers and retirees enrolled in defined benefit plans.” It calls for Congress to “set premium levels that reflect PBGC’s financial needs, protecting retirees and finally ending the threat of a taxpayer bailout.” The proposal does not include anything like, e.g., the following statement from the Administration’s 2017 budget:
The Administration believes additional increases in single-employer premiums are unwise at this time and would unnecessarily create further disincentives to maintaining defined benefit pension plans.
All of this raises the questions: Are House Republicans prepared to raise PBGC single-employer premiums again (despite widespread criticism of the last increase)? And are they (possibly) considering using the single-employer fund to bail out the multiemployer fund?
Ensure plans are well funded and employers remain in the system: “Congress should make sure benefits are secure for workers and retirees and that employers are not discouraged from voluntarily offering these plans.” It is unclear what policy the House Republicans support to further these goals.
Protect access to affordable retirement advice: This proposal appears to be advocating “rejection” (Congressional repeal?) of the Department of Labor’s recent Conflict of Interest regulation.
Make it easier for employers to band together to offer 401(k)s: This proposal generally advocates allowing “open MEPs” – multiple employer plans that, e.g., are not subject to the “commonality” and “one bad apple” rules. (In this regard, see our article New in the 2017 budget: no single employer PBGC premium increase; open MEPs.)
Reduce costly red-tape: This proposal advocates “modernizing and streamlining” rules for the electronic delivery of employee communications and financial disclosures.
There’s a lot in here – let’s analyze it using as “organizing principles” some basic assumptions about tax reform in the current political situation.
1. To repeat what we said at the top: these House Republican proposals are, arguably, just as relevant as those of the Presidential candidates. There is a good chance that whoever wins the Presidency will still have to deal with the policymakers who put together these proposals.
2. Fundamental tax reform is politically unlikely: passage is largely dependent on whether one party can (i) get control of the (all of) the House, the Senate and the White House and (ii) is willing to make fundamental tax reform a priority.
3. Corporate tax reform is, however, possible – there is bipartisan agreement that something should be done about it. So the corporate tax reform proposals the Republicans are making may be relevant (and part of the discussion) even if, e.g., we continue to have a divided government.
4. “Small ball” proposals, e.g., open MEPs and “cutting red tape,” may also be possible – provided the Administration (of whichever party wins this November) backs them (or at least is prepared to accept them). Right now, the Obama Administration has issues with both of these proposals.
Taking the House Republican proposals seriously, we repeat our two rules of thumb for analyzing the effect of tax reform proposals on the tax-attractiveness of retirement savings:
Increases/decreases in taxes at the corporate level will reduce/increase returns to all savers, regardless of whether they are saving inside a plan or outside a plan.
Increases/decreases in taxes on individual savers (e.g., an increase/decrease in the tax on dividends or capital gains) will make saving inside a plan more/less attractive.
The House Republicans are proposing to lower corporate level taxes. We don’t have the math, but the Tax Foundation estimates that the corporate tax proposals will cost $1.2 trillion in lost revenues over 10 years. That will translate into increased returns for all savers.
They are also proposing to lower individual level taxes on investment income. And that will make, e.g., saving in a 401(k) (marginally) less attractive than it currently is. The same could be said of the proposal for Universal Savings Accounts.
We note, however, that the (current) House Republican tax proposal is more favorable to retirement savings than the one produced in 2014 by (then) Chairman of the House Ways and Means Committee Dave Camp (R-MI). Congressman Camp’s proposal included (very complicated) provisions that worked something like the Obama Administration’s proposal to cap certain tax preferences – including the exclusion for contributions to a defined contribution plan – at 28%. The Administration’s proposal of a 28% cap seems to have been adopted by Former Secretary of State Hillary Clinton and may be an element of Mr. Donald Trump’s proposal. (See our article Candidates’ tax proposals and retirement savings tax benefits.)
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We repeat that – unless one party controls both houses of Congress and the White House and makes tax reform a priority – it’s unlikely that any fundamental tax reform proposal will be implemented. The most likely tax reform – given a divided government – is a change in the corporate tax, which may involve a change in how investment income is taxed.
The latter change – a corporate tax reform-related change in the taxation of investment income – could go either way. If it increases taxes on investment income, then retirement savings will be (marginally) more tax-attractive. If it decreases taxes on investment income, then retirement savings will be (marginally) less attractive. We discuss these possibilities in more detail in our article Corporate tax reform and retirement savings tax policy.