Tax Reform-Head's Up, Watch Out, Help Out!

Last month, on August 29th, I watched President Trump give a speech and promise tax reform.   President Trump and Congressional Republicans promise to enact reductions in marginal income tax rates: 

• For individuals – potentially a change from seven marginal rates ranging from 10% - 43.4% (with surcharges) to three personal rates 10, 25 and 35%, and 
• For corporations – a reduction from a top rate of 35% to 15%. 

Sounds good if you are a taxpayer today.  

Unfortunately, over the past 10 years (August 29, 2007 – August 28, 2017), we added $10.8 Trillion to our national debt, increasing it from $9.0 Trillion to $19.8 Trillion, a 120+ percent increase!  And, without change, we are “on track” to add another $10+ Trillion to the national debt over the next 10 years!  Somebody’s got to pay for all of this, and I doubt we can send the bill to the French!

So, not so good for taxpayers in years to come.    

Plus, if you cut marginal income tax rates but don’t change spending, don’t change other tax provisions, and fail to trigger increased economic growth, some predict it could add another $3.5 Trillion in additional debt.  Most calculators don’t have this many digits: $33,500,000,000,000 in national debt or $33.5 Trillion Dollars. This is 150 percent of projected annual Gross Domestic Product.   

Really ugly.  

How Will This Affect 401(k) and 403(b) Plans?  
Some argue that lowering tax rates will jump start the economy, increase economic growth and raise tax revenues.  Could happen, might not.  A Heritage Foundation study concludes:  “… When tax rates are reduced, the economy's growth rate improves and living standards increase.” (See: http://www.heritage.org/taxes/report/the-historical-lessons-lower-tax-rates) However, for comparison, a 2014 Congressional Research Service study states: “A review of statistical evidence suggests that both labor supply and savings and investment are relatively insensitive to tax rates.”  (See: http://www.ctj.org/pdf/crscorporatetaxreformissuesforcongress.pdf )    

So, expect Congress to try to hedge lower tax rates by reducing other tax preferences (deductions, exemptions, etc.)  One likely “pay for” candidate is the tax preference for retirement savings. That’s what we heard earlier this year from the White House – see:  https://www.whitehouse.gov/the-press-office/2017/04/26/briefing-secretary-treasury-steven-mnuchin-and-director-national.  This briefing suggested that the only tax preferences that would continue were “… the home ownership and charitable gift tax deductions.”  In a briefing the same day, Treasury Secretary Steve Mnuchin confirmed:  “… Correct, we are going to eliminate on the personal side all tax deductions other than mortgage interest and charitable deductions. ” Director of the National Economic Council, Gary Cohn also stated:  “Homeownership, charitable giving, and retirement savings will be protected.  But other tax benefits will be eliminated.”

Mr. Mnuchin never specifically mentioned retirement savings. The one-page written summary didn’t either.  Mr. Cohn limited his offer to “protect retirement savings, ” but he did not specifically identify all retirement plans let alone all employee benefits.  On June 21st, Speaker of the House Paul Ryan stated:  "We will clear out special interest carve outs and excessive deductions and focus on keeping those that make the most sense: home ownership, charitable giving, and retirement savings.”  (See:  https://www.speaker.gov/press-release/full-text-speaker-ryans-first-major-speech-tax-reform)  The joint statement on tax reform on July 27, 2017 was light on details and didn’t confirm protection for any preference.  And, importantly, no one has defined what “protected” means.  See”  https://www.whitehouse.gov/the-press-office/2017/07/27/joint-statement-tax-reform 

PSCA Has Responded
In response, PSCA joined a broad-based coalition called Save Our Savings to preserve the current tax preferences.  (See: https://www.saveoursavings.org/)  We are knocking on the doors of members of Congress to present our best arguments for maintaining tax preferences for all employee benefits including retirement plans.  

What Should You Do?  
The time to weigh in is NOW!  You can help. Pick up a phone. Give your congressman and Senators a call. Let them know that tax preferences for employee benefits and retirement savings are effective and successful - and should not be changed. After calling them, send them an e-mail or post a comment on their website.  Then, visit their offices. Make sure they know that the tax preferences for employee benefits should not be reduced.