The Republican government is all set for tax reforms after it battled to reform the healthcare system. The tax plan by the new government is aimed at increasing the tax cut for corporations and the wealthy. In order to fund the tax cuts, the government might have to tap into retirement savings. To completely understand the motive behind the government to take this step, one must comprehend tax expenditure.
Tax expenditure refers to the billions of dollars that are gained from tax code exemptions, credits or deductions. Tax expenditures are aimed at benefiting a specific group of taxpayers or activities. The deductions will be received by the employers for mortgage debt interest, capital gains, and employee health insurance costs.
The health care system proposed by the government was supposed to reduce the federal deficits by $337 billion over the next 10 years. As the reformed health care system didn’t pass, $1 trillion or more will be required for the proposed tax reforms. According to the nonpartisan Tax Policy Center, the tax expenditure for retirement savings crossed $158 billion in 2015 and is expected to go beyond $1 trillion till 2019. The tax break from pensions, Roth IRAs, and 401(k)s.
The plan to reform the tax was formulated by Dave Camp, a Michigan Republican who presided the House Ways and Means Committee. Camp suggested setting the limit on employee deferrals to $8,750 beyond which the amount would be taxed directly. Camp aims at shifting the focus to Roth accounts. The contributions to Roth accounts are made with post-tax dollars, keeping the tax revenue for the year.
All employers that have a staff of over 100 are required to permit Roth Contributions in the plans for their workplace. Contributions to traditional IRAs would be rejected and income restrictions on Roth contributions would be eliminated. Tax revenues for the next 10 years will look like new revenue is being generated as expenditures are closing down. However, from a macro budget viewpoint, it’s the opposite.
Principal withdrawn at any time from Roth accounts will not be penalized, which might lead to account leakage according to director of fiscal policy at the Bipartisan Policy Center, Shai Akabas. Account leakage is when money is withdrawn from retirement savings for nonretirement purposes. The government is interested in creating Universal Savings Account (USA) to address the shortfall of emergency savings in countless households. However, it might discourage small business organizations from providing retirement plans.