The din around "tax loopholes" always increases in April, but this year, it has been especially loud as Congress argues over how to reduce the deficit while keeping tax rates low for everybody.
One of the issues that seems to get lost in the shouting is that the biggest loopholes are deductions most people support. The largest of them is employer-provided health insurance. The second-largest are deductions for contributory retirement plans like 401(k)s, individual retirement accounts, Keogh plans, etc., which are vital to most people's retirement planning.
This year, the tax-reform gurus on both sides of the aisle are actually talking about getting rid of tax deductions for 401(k) and IRA contributions. The American Society of Pension Professionals & Actuaries, or ASPPA, has raised its hand to point out that these tax deductions are eventually recaptured when retirees pull money from their plans. ASPPA economists contend that the cost to the U.S. Treasury of the retirement savings tax break is actually 54 percent lower than the Joint Committee on Taxation and the Treasury Department’s Office of Tax Analysis calculate.
ASPPA’s Executive Director Brian Graff says, "This is bookkeeping fiction. The money they think they're raising isn't real. We ought to be making policy based on numbers that make sense."
ASPPA argued that and other points today before a hearing of the U.S. House Ways and Means Committee regarding Tax Reform and Tax-Favored Retirement Accounts. Judy Miller, director of retirement policy for the association, testified that rewarding people with tax savings for putting aside money for their old age works. She told the committee that according to the Bureau of Labor Statistics, 78 percent of all workers have access to a workplace contributory retirement plan, and 84 percent of those people actually participate in it.
That's a significant number no matter how you calculate it.
Miller also testified that the system is effective for other reasons. Because of rules that make sure incentives for employer-sponsored retirement plans don’t discriminate in favor of the highly paid, "Households earning less than $100,000 pay 26 percent of income taxes but get more than 60 percent of the benefit of this tax incentive," Miller told Congress.
Like my grandma used to say, "If it's not broke, don't fix it."