Among the many tax “loopholes” on the chopping block in the fiscal cliff negotiations are the 401(k) contribution limits. Liberals like to refer to tax deductions, deferrals, and exemptions as “spending through the tax code,” or “tax expenditures.” Of course, there are certain tax subsidies and credits that might best be described as spending (e.g., subsidized coverage on the Obamacare exchanges).
But conservatives and libertarians recognize that private property rights are at the foundation of individual liberty, and that any just government must be dedicated to protecting the individual’s right to the fruits of his labor. Treating a legitimate tax deduction as government spending presumes that the government has a right to those fruits by default - that we are privileged to retain any such fruits, and the government spends its funds in permitting it. This confiscatory mindset is foreign to our founding and inconsistent with our nature.
The proposed changes to 401(k) contribution limits are a good example of the threats to economic liberty we face as the revenue hawks continue to scour the tax code for backhanded tax increases.
What is a 401(k) Plan?
The traditional 401(k) plan is a method of tax deferral. You contribute with pre-tax dollars, the account grows tax-free, and you pay ordinary income tax on the distributions when you retire. If your employer offers a Roth option, you can contribute with after-tax dollars, and both the gains and distributions will be tax-free. In 2012, employees can elect to contribute up to $17,000, and the total employer/employee combined contribution limit is $50,000.
What’s Being Proposed?
Eight hundred and fourteen days. That is how long it has taken me to lose my last shred of respect for the current President of the United States. Erupting onto the national political stage at the 2004 Democratic National Convention, Barack Obama was immediately praised as a rising star. A charismatic, well-spoken young politician, he clearly had a future in politics. A tall, lanky senator from Illinois, he drew comparisons to Abraham Lincoln. A black man that avoided being characterized as a black politician (as opposed to a politician who happens to be black), he avoided bombastic speeches about racism and reparations. He gave white Americans still harboring guilt over our ancestors’ participation in the evil of the human slave trade the chance to prove they were no longer racist by voting for him. His entire campaign was a nebulous celebration of “Hope and Change”. He was the post-racial, post-partisan candidate that as president would heal the divide between black and white, Republican and Democrat.
That was then, this is now.
Last month, having given speech after speech decrying the need for fiscal responsibility and the need to rein in the deficits and get the debt under control, President Obama unveiled a $3.7 trillion dollar federal budget that increased federal spending and projected (based on unrealistically optimistic growth rates for the next few years) $1.6 trillion in deficits for the year, with annual deficits averaging around $1 trillion over the next decade. It increased spending. It did nothing to control the largest contributors to the deficit and long term debt (Social Security, Medicare, Medicaid and interest on the $14.2 trillion national debt). In short, the serious discussion he claimed to want regarding fiscal responsibility was nowhere to be found in his budget.
With the focus on the sequester, Alan Simpson and Erskine Bowles, who co-chaired the National Commission on Fiscal Responsibility and Reform, are hoping to become relevant again by pushing a new deficit-reduction plan. Last week, the two announced a plan that would reduce deficits by $2.4 trillion over the next 10 years:
A quarter of the deficit reduction – $600 billion – would come from healthcare savings, with Bowles and Simpson calling for lower provider payments, higher premiums for higher earners, savings from lower drug costs and “adjustments to account for an aging population.”
Bowles and Simpson call for an additional $1.2 trillion in other spending restraints, including mandatory spending cuts, tighter discretionary spending caps and a new formula for calculating inflation that would slow the increase in government benefits.
A reform of the tax code that loweres rates while also eliminating tax breaks would provide the other $600 billion.
David Dayen of Firedoglake, the liberal social democrat blogging community, has a recent post up about how we have almost reaching our spending cut targets. Since we know that spending has actually increased as of late, not gone down, I had to take a look and see what he was talking about. David writes:
Jared Bernstein of the Center on Budget and Policy Priorities has an important piece that reinforces something I’ve been saying for a long time. Contrary to the opinion of Michael Grunwaldthat there has been no austerity in Obama’s first term, Bernstein lays out the numbers that actually shows the austerity, in both the short- and long-term, that actually encompasses most of what deficit scolds seek in their grand bargain. And this is actually a bad idea, as Bernstein illustrates.
These developments are poorly understood by those—most vocally, SB advocates—who continuously inveigh that we’re not “serious” about cutting spending. In fact, that’s the only thing we’ve been “serious” about so far, such that we’ve actually achieved 70% of the discretionary spending cuts called for in the SB budget plan. This does not count war savings, nor does it include savings on interest payments, which would add another $250 billion to the savings.
Politico ran an interesting story on Wednesday about how Rep. Paul Ryan (R-WI), chairman of the House Budget Committee and now Mitt Romney’s running mate, “spurned” the Simpson-Bowles commission, which was put together by President Barack Obama to find a solution to the United States’ debt and long-term entitlement issues:
he commission has lived larger in mythology after its demise than it ever did while doing its work. Partisans and commentators on all sides — and in particular centrists and business leaders — hail the efforts of co-chairmen Alan Simpson, a Republican, and Erskine Bowles, a Democrat, as exactly what Washington needs more of.
And they cite the inability of its recommendations — a mix of spending cuts and increased revenue proposals — to gain momentum as deplorable evidence that Obama and GOP leaders won’t put the national interest in solving the budget crisis over their own narrow partisan concerns.
Now the saintly, do-good aura that surrounds Simpson-Bowles presents an awkward challenge for Mitt Romney and his running mate. Romney is pitching Ryan as a problem solver who wants to use his command of the budget to forge bipartisan deals to solve the nation’s fiscal crisis.
But in reality, Ryan, according to the recollection of some commission members and staffers, was a key part of the dynamic that undermined the commission and allowed the triumph of partisan and ideological loyalties over a budget deal.
Under its charter, the commission needed a supermajority of 14 members in order to give its formal endorsement to any recommendations. Ryan joined six other members — the dissenters came from both parties — in voting against the final proposal, with 11 members in favor.
Whether or you agree with them or not, Republicans in both chambers of Congress have put forward bold and innovative budgets that look for ways to bring the nation back on a path to sustainability.
While Sens. Rand Paul (R-KY) and Pat Toomney (R-PA) have offered their own separate proposals, the budget put forward by Rep. Paul Ryan (R-WI), which has already passed the House, is the vehicle that most Republicans are choosing to reform spending, entitlements, and taxes. What are Senate Democrats pushing? Well, nothing:
April 29 will mark three years since Senate Democrats passed a budget. This dereliction of duty flagrantly violates the 1974 Congressional Budget and Impoundment Control Act.
“On or before April 15 of each year, the Congress shall complete action on a concurrent resolution on the budget for the fiscal year,” this statute states. Senate Democrats could not care less about this federal law.
This is a milestone in human sloth. While it has taken Majority “Leader” Harry Reid of Nevada and Senate Democrats 36 months to conceive zero budgets, House Republicans have delivered two - one for each year they governed.
Nonetheless, Mr. Reid said on Feb. 3: “We do not need to bring a budget to the floor this year. It’s done. We don’t need to do it.”
“This is the wrong time to vote on the floor,” Senate Budget Chairman Kent Conrad, North Dakota Democrat, declared Tuesday. “I don’t think we will be prepared to vote before the election.”