The Corner

Economy & Business

Republicans Should Kill This Bad Tax Reform Idea

Republican plans to overhaul the cumbersome, over-complex tax code are still under construction, and the legislative process being what it is, they will likely continue to evolve as proposals wind their way through both Houses of Congress. Given the failure to pass health care reform through the Senate, and the fact that tax bills can pass the Senate with just 51 votes, there will be tremendous pressure on Republicans to hammer out a deal amongst themselves that can pass, and that will likely lead to a fair amount of horse-trading. But conservatives should remain on alert to mobilize against anti-growth proposals getting smuggled into the bill just to appease the budget scorers at the Joint Committee on Taxation and the Congressional Budget Office.

One particularly bad proposal can be found in an unsourced trial balloon floated in Politico:

[T]he tax negotiators are scouring former Republican Rep. Dave Camp’s 2014 tax plan for other ideas…One idea quietly being discussed would be taxing the money that workers place into their 401(k) savings plans up front: an idea that would raise billions of dollars in the short-term and is pulled from the Camp plan. This policy idea is widely disliked by budget hawks, who consider it a gimmick; the financial services industry that handles retirement savings; and nonprofits that try to encourage Americans to save.

Decisions still being hammered out are whether a hypothetical tax bill adds to the deficit over a 10-year period — a key factor in passing legislation through the budget process known as reconciliation, which requires fewer party-line votes than normal legislation.

While the overall goal of cutting business and investment taxes by lowering the corporate tax rate is a good one, much of the pro-growth benefit of reducing business taxes will be kneecapped if the budget bean-counters get away with slapping additional taxes on money invested in 401(k)s, many of which flow into investments in the same corporations getting the tax cut. Taxing individual retirement savings is also bad from the standpoint of conservative economic philosophy, because it discourages self-reliance. It would unsettle plans made in reliance on the existing code by lots of people – not a reason to freeze the code in amber, but certainly a caution for anyone monkeying with the rules. And as an electoral matter, it’s likely to be politically radioactive with precisely the sorts of wavering suburban voters who were staunch Republicans during the Obama years but are uncomfortable with Trump. Absent a really major overhaul of the code, this is a tax hike on a lot of people, and Congressional Republicans already worried about the burden of Trump on their 2018 re-election prospects should run as far as they can, as fast as they can, from being seen as tax-hikers, the most poisonous label that an elected Republican can bear in modern American elections.

Any Republican tempted to justify this plan should remember why they opposed Obama when he tried things like this, and why they were generally swiftly withdrawn. In 2013, Obama proposed maximum caps on tax-free retirement savings, a plan that was quickly shelved when it prompted an outcry. In 2014, his budget again proposed tax limits on some 401(k) investments, and failed again. In 2015, Obama took aim at savings again, trying to eliminate 529 college savings plans, an idea that was hastily abandoned after it kicked up a furor. And as late as 2016, Obama was proposing regulations to strangle Health Savings Accounts.

For Obama-style Democrats, there is at least a philosophy at work here, one that is ideologically opposed to letting individuals provide for themselves and their families, on the theory that such policies exacerbate economic inequality and both reduce demand for universal government plans and limit their sources of financing. But that kind of collectivist mentality should be the last thing that Republicans, who screamed bloody murder about Obama’s proposals, should be adopting just because there’s a different guy in the White House. Let’s hope they have the good sense to make sure this idea stays on the cutting room floor.

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