Thursday, April 13, 2006

Your (Republican, Conservative) Congress At Work

The Trojan Pension Bill - New York Times:
So far, the ploy has served only to highlight the extent to which the pension bill is already a grab bag of bad tax ideas.

The House version of pension reform, for example, would permanently increase the before-tax amounts that employees could stash each year in a 401(k). When the 2001 tax law expires as scheduled at the end of 2010, the contribution limit is supposed to revert from $15,000 this year to $10,500. That's prudent. The $15,000 limit is so lofty that no more than 5 percent of households ever contribute anywhere near that much.

If the House gets its way, however, the maximum contribution will remain $15,000, and will rise each year with inflation. This makes no sense. Study after study shows that high earners don't need more tax incentives to get them to save more. Providing additional tax shelter would not lead to new savings. It would simply reward high earners with tax breaks for something they would have done anyway, while worsening the budget deficit.

Because personal savings would not go up, but federal borrowing would, the provision would actually reduce national savings — the sum of private and public saving. A drop in national savings means that the country as a whole is worse off, even if a favored few grow richer.

To add insult to injury, the House's pension bill would also weaken the saver's credit, a tax incentive currently on the books to help low-income people save for retirement. The bill would make the credit a permanent feature of the tax code. But unlike the 401(k) provision, it would not be adjusted for inflation and so would become increasingly less valuable over time.

There is no sensible explanation for doing that. Unlike high earners, low-income people need an extra push to save. What's more, when people who otherwise would not save manage to do so, national savings go up.

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