TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, May 13, 2014

Stein & Turner: Capping the Amount Allowable in Tax-Preferenced Retirement Plans

Florida Tax ReviewNorman P. Stein (Drexel) & John A. Turner (Pension Policy Center, Washington, D.C), Equity in the Distribution of Tax Preferences for Pensions: Capping the Amount Allowable in Tax-Preferenced Retirement Plans, 15 Fla. Tax Rev. 87 (2014):

This paper proposes setting a cap on the amount an individual can hold in tax-preferenced defined contribution plans and IRAs of $5 million, indexed for inflation. This simple proposal would improve the equity of the distribution of tax preferences in the pension system. The discussion has not fully detailed how the proposal might be implemented, but has instead focused on the concept and the broad outlines of the proposal. The proposal is in keeping with the intent of Congress and the tax and pension policy communities to limit the maximum tax preference an individual can receive on a pension plan. It is similar in concept to a limitation in pension law in the United Kingdom. The proposal would be relatively easy to enforce. The proposal would result in an increase in taxes paid by some wealthy people, without an increase in marginal tax rates.

The paper also briefly discusses some alternative approaches that merit consideration. Each of the proposals would increase tax equity and would address the perception that wealthy individuals in the United States enjoy special tax preferences that are not open to most Americans. It would also raise some additional tax revenues in a time of budgetary stress.

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The IRC seems like a poor choice to adjudicate "equity", promote "net social utility" and the like. Each morally charged Code provision might create a nice incentive when examined in isolation, but ultimately loses effectiveness in the aggregate. When you bought your house, how many disclosures did you read and take notes on before you signed? Only the wealthy can afford to hire specialist to wade through the mass of well-intentioned incentives.

Let’s take this paper as an example. The IRC currently incentivizes individuals to invest labor income. This paper proposes a tweak so that incentive doesn’t generate too much investment. But step back, what is the broad objective here? We have decided that (a) the public fisc should support the elderly poor and because of that (b) the young should invest enough so they don’t become the elderly poor. Besides that, we don’t really care: and think everyone should invest according to their counsel, how they balance present and future.

None of that involves the federal government collecting money, it’s entirely concerned with transferring money. So, let’s directly address the transfer, e.g., the elderly with little investment gets benefits and the elderly with lots of investments get none. Of course we’ll differ on particulars, but the point is that we’ve located the debate right at the heart of the matter, placed it among the affected parties who can balance the moral quandaries in an informed way.

In contrast, the IRC hides the moral choices from the affected citizens. The 20 to 50-year olds are far too distracted to worry about complicated future contingencies (retirement) and retired seniors don’t care about current income tax on workers. Mutual disinterest creates a perfect dark place for lobbyists to sideline the broader principle with their masters’ objectives. But under my proposal, the seniors would personally feel any change in how elderly transfers are allocated amongst themselves and invested in a nice, self-interested conversation about it. And the 20 to 50-year old can enjoy a greatly simplified economic life.

(Less relevant to this paper, but the IRC is also a bad way to adjudicate "equity" and promote "net social utility" because its focus is the calendar year (with limited cross-temporal provisions). Does anyone think moral judgment should so cramped? Should we judge an individual’s responsibility to group and the responsibility of the group to an individual based on the past 12 months?)

Posted by: Yo Gabba Gabba | May 14, 2014 2:50:55 PM