There has been a lot of chatter recently about significantly reducing or completely eliminating various income tax rates and this got me to thinking about what might be some of the unintended consequences (or at least some undiscussed behaviors that might develop - both good and bad).
In thinking about myself, if income tax rates were very low or taken all the way to zero, I would probably retire now and cash in (or convert) my tax deferred retirement accounts. I would be willing to suffer the 10% tax penalty 10 years early if I knew that any future gains would be tax free or at least treated as capital gains (assuming LTCG didn’t get eliminated too).
Similarly, I think it would also have a negative impact on other people saving for retirement. Tax avoidance (coupled with tax penalties for early withdrawal), even on the low end of income, is a big driver of why people save in a tax deferred account. I think it might significantly reduce the incentive for people to save on their own.
In other words, great for those with means, less so for those without.
It would also likely make corporate debt more lucrative while at the same time, having a negative impact on munis and treasuries.
It probably would be terrible for many charities.
I am sure that there are likely other obvious ones I am missing. In my brief research on this topic, I came across the following related article that while informative, is more for entertainment:
The Twix and White Claw tax avoid strategies are crazy smart.
Lastly, it isn’t just a new administration that is toying with this idea again:
Warren Buffett got it right. Just let the money grow untaxed and then sell a few shares for current income, if you need to.
About 25 years ago I remember reading an article in either Fortune or the WSJ where a reporter visited the BRK annual meeting and observed that the attendees weren’t dressed like the folks at the Exxon and IBM meetings.
“This appears to be the largest gathering of multi-millionaires living on less than $30,000/year.”
One of the chatter vectors has been about the stated intent of the plan that he never heard of to eliminate the IRS. Some chatterers have suggested the plan is to reverse the tax base change of 1913, when tariffs, long a major source of revenue for the government, were reduced, in exchange for the implementation of an income tax.
(assuming LTCG didn’t get eliminated too).
I would suspect tax on cap gains and divi income are the most likely to be zeroed out.
Similarly, I think it would also have a negative impact on other people saving for retirement.
Over recent years, we have seen the passage of laws to explicitly allow “automatic 401k” enrollment. Automatic enrollment is now mandatory. So the Proles never see their money. It automatically is handed over to Wall St to play with, and skim.
Extracting money from Proles, and handing it to Wall St, has strong, bipartisan support.
First off, a very large percentage of the people already pay zero income tax. Probably close to 50% of the people.
Second, you can currently see what people do at low tax rates. One of which we spend a lot of time discussing here. And that is the conversion of Traditional IRA money to Roth IRA money to use the lower tax brackets to their full extent (the 0%, 10%, and 12% brackets, and sometimes even the 22% and 24% brackets).
This is an extension of what I mentioned above. Convert as much as possible at the lower, or zero, rates.
You should have seen the pushback I got at the pump seal company, when I tried to “opt out” of an automatic increase in how much they deducted from my pay for life insurance. That company’s tactics for extracting United Way donations bordered on extortion.
RS had both a stock purchase plan and retirement plan. A newly promoted manager told me how the DM did not take “NO” for an answer, He put the enrollment forms in front of her, with words to the effect “shut up and sign”.
When I started at the moving company, the CFO came around to sign me up for their 401k. I explained that I had had an IRA for a number of years, though several different employers. That was my retirement plan. He kept after me, year after year. I, a low level staffer, was telling the CFO of the company “what part of NO don’t you understand?” Then I started receiving statements for “my 401k”. I had never sighted anything. I had, often explicitly said NO. He had signed me up anyway. They never took any money from my paycheck, but, officially, I participated in their 401k. Of course I objected, as soon as I got that first statement. I demanded that account be closed out. The CFO refused. I was getting those statements for the remaining years, before I retired.
Don’t even try to tell me employees can “opt out” of an automatic 401k, without significant pushback, and consequences that could impact their entire career with the company.
I saw a panel discussion where they said if you made Medicare Advantage the default at age 65, you could boost it to 75% of the market. Most people don’t shop until they’ve gotten screwed.
Nowadays benefits are chosen via website, online, from the privacy of your home (or office or cellphone). Nobody is there to push back all that much. And when you click “OK” at the end, they make you confirm once or twice that you know you are choosing to opt out of stuff. But once you click that final “OK” and once the open enrollment deadline passes, it’s over, no more changes.
You have worked at some strange places that have shaped your view of how this works everywhere. These programs are typically under HR so why you have a CFO interested also is a key indicator that where you work is not normal.
These programs are now completely online if you enrol or choose to opt out if your decision without coercion. Even as a manager, I have no idea if my employees are doing ESPP or not as it is there decision and nobody will every question you. As the shares going directly to a trade account, the decision to sell is completely yours.
It was a small company, like the media and pols are always fawning over, maybe 200 people. I’m not sure they had an HR Department. The CFO was certainly running the 401k personally.
The pump seal company’s life insurance thing was keyed to how much you were paid. It was the late 70s, so the COLA ratcheted up pay rate every quarter. At the end of the year, I would get a letter, words to the effect “congratulations. your increased pay qualifies you for more life insurance, so we will be taking an additional $10 (or whatever it was) out of each of your paychecks” That company had an HR department, but they didn’t handle the life insurance. I had to go to accounting and argue with two, maybe three levels of people, and I mean argue, to keep that $10.
My point is that “anyone can opt out” just is not so. Depends on the company. If the company “JC” decides he wants something crammed down everyone’s throat, they are going to be crammed, whether they like it or not.
The pump seal company honcho never volunteered to give me a dollar. The VP Marketing would stick his head in my cube, glare at me, and say “you intend to give, don’t you?” They did not do it while I was there, but I heard there was one year where management filled in the donation amount on the card that they expected each person to “give”, and it was not a trivial amount. It was well in excess of $20, and this was in the early 70s.
Probably not. When I had a bunch of people working for me from 1998 through retirement a few years ago, and none of that information was ever shared with me, so I had no idea who signed up for the 401k and who didn’t or who opted to take the life insurance and who didn’t. Companies are very cognizant of privacy concerns nowadays, sometimes because they care, and sometimes because they care about being sued someday.
United Way is a different thing because they have local canvassers trying to convince people to donate. I DESPISED those united way drives with a passion and never took part in it. I have my own favorite charities thank you very much. Did you know that those lousy folks count all those donations when they report how much “the company” donated to charity?
That will hardly be the case for anybody today. At least I started working in 1995 and never had case where anybody put pressure to do ESPP or 401k outside of an annual benefits program update done by the program managers which is always a department within HR. My first job was IBM and second was a small .com in Silicon Valley so you probably had to do forms back then. I haven’t worked in the US since 2004 but always worked for US companies so still can do ESPP as well as be given Options or RSUs, since then it has been completely online so nobody questions your choices and your decision to hold or sell company shares as long as not in a black out period.
So if you want to say “anyone” than probably you are correct that there maybe some backwards company that pressures an employee to do 401k (Im not sure why it benefits the company). I had heard some companies during .com era pressure employees not to sell their options or ESPP that were direct holding in shares… but this is probably down to fridge cases now where your employer doesn’t even know what you do
That last one, the moving company, where the CFO badgered me, for years, about the 401k, then signed me up, against my express wishes, and refused to close the account when I demanded he do so, was where I worked from 2006 until retirement at the end of 2011. Not that long ago.
You state that like no one else in the world has every worked at a job with auto-increases. I am intimately familiar with how it works - as is probably 200 million other Americans - yet we seem to be able to get on with our day without suffering this level of trauma over opting out.
As an employee, I am telling you that employees can opt out without significant pushback or consequences. Again, you seem to think no one else in the world has every opted out before.
It has morphed into “Giving Tuesday” - which was yesterday. When this first rolled out, my company was excessively obnoxious about it to the point that we had conference calls about it. That was probably five years ago. Now, we just get a single email.