Responsibility #56
(written prior to July 1992)
To the People of the United States of America:
In Responsibility #53, we espoused requiring the federal government to go from macro to micro management, as a means of invoking inviolable principles, that would govern the generation of federal revenues, and the expenditure of federal appropriations. Specifically, the Congress would be required to shift the revenue burden from all taxpayers, to those who benefit from, or who incur the cost of, appropriation expenditures.
This would greatly inhibit new programs that are not for the general welfare. What new programs there are, of this ilk, would be funded by revenues drawn from responsible sources. They would not contribute to deficits.
Congress would also shift the revenue burdens of existing programs, in accordance with the same principles. Many programs are likely to be aborted, when the beneficiaries see that they now must pay for their "lunches". For the "non-general welfare" programs that remain, there would not be a reduction in, but only a shift of, taxes. In both cases the federal deficit would be substantially alleviated.
In Responsibility #54 and #55, we laid the groundwork for dispensing with the give-aways and unconstitutional features of tax deferred retirement plans, and certain insurance products. These actions would not only be just, but they would have huge effects in curing our deficits, and in paying down our national debt. The great majority of us would be blooded, anywhere from a pin prick to a gushing aorta. The greatest bleeding would come from those with the most blood, those with "fat cat" retirement plans, and/or with high value life and annuity insurance policies.
This is not due to any intent to "level wealth", but is a consequence of unfair tax breaks given to these recipients in the past. The beauty, of this partial cure to our debilitating national deficits and debt, is that it would have little or no effect on our current spendable income. It would have an effect on the degree that some can "live-it-up" in retirement.
Specifically, for tax deferred retirement plans, it would be just and best for the general welfare for:
1. The federal government to stand clear of private retirement plans, except for the degree of regulation deemed necessary to give participants protections similar to other investors in the market place.
2. The tax deferred status to be removed.
A. Employer contributions would be tax deductible for the employer, but taxable like salaries and wages for the employee.
B. Employee contributions would come from after tax dollars.
C. The retirement plans would pay current taxes on all current income (interest, dividends, capital gains/losses, etc.).
D. Like investments outside of retirement plans, retirement plans would continue to defer capital gain/loss on land, real property, stock, fixed income securities, etc., until the gain/loss would be constructively realized.
E. At the end of the first plan fiscal year after enactment, retirement plans would file a return, and pay taxes on all previously tax deferred income from all sources.
F. All government imposed complexities in the plans would be relieved, except those (or new ones) required by 1. above.
3. It might be necessary (1. and 2.F. above) to retain the requirements for custodial banks and, for Defined Benefit plans, something akin to the Pension Benefit Guaranty Corporation (see Responsibility #54). In all cases, the legislation should make it absolutely clear, that the federal government guarantees no retirement plans.
Before the naysayers (who would maintain the status quo) bellow, a few remarks should be added.
First, it would be said that there would be fewer retirement plans, lesser retirement plan assets, and lesser benefits paid at retirement. True.
Fewer employers would elect to establish, or to continue to maintain, retirement plans when the tax deferment incentive is removed. On the other hand, some employers may be more favorable to establish and maintain retirement plans, when the costs, complexities, and limitations (e.g., top heavy restrictions) of government requirements are eliminated or relaxed. Although the benefits paid in retirement would be less, they would be tax free (versus fully taxable).
Second, the total savings (retirement plans, savings and other investments) of taxpayers would be reduced. True, only to the extent of the effects of pay as you go taxes.
When universal Individual Retirement Accounts were enacted in the early 1980s, a large part of their makeup proved to be funds merely shifted from non-tax-deferred savings and investments. The reverse shift occurred, when IRA eligibility requirements were constrained a few years later.
True some people would choose to spend, or use their funds elsewhere, when the tax inducement of retirement plans is canceled. Each of us has conflicting needs for our financial planning: buying a home, children's education, health care, changing careers, retirement, etc. We have more latitude to meet changing economic conditions, when our savings and investments are not locked in, to one degree or another, in tax deferred retirement plans, which have penalties for premature withdrawals.
Third, there would be adverse effects on the financial markets. True, but only to a limited extent, and these may be more than offset by positive effects.
Most of the decreased investments of retirement plans would be placed instead by the individual investors. The retirement plans may play a somewhat less powerful role on Wall Street, but their power has already proven to have ill effects (e.g., in program trading). Retirement plans are likely to speculate, and churn assets less, when the long term retention of assets is the only means of avoiding current taxation.
Finally, planning ahead would preclude a run on the market, as compliance with 2.E. above is accomplished. The law could permit retirement plans to execute secured debt instruments, to pay off the taxes due to IRS monthly over a period of time (say, 2 years). Alternatively, the IRS could accept securities as tax payments, and then have a contracted agency sell them over a period of time.
Fourth, the changeover would be costly in that retirement plans would have to be rewritten. True.
Although companies providing the retirement benefit would bemoan the loss of the unfair and unconstitutional income tax inducement, they would revel in the less cost and complexity entailed in the non-government imposed plan conditions.
We will put forth recommendations on Social Security, military and civil service retirement plans, in the next several papers.
Publius IV
