BO's Budget Plan Includes Mechanisms For Bracket Creep & A Wealth Confiscating Tax

"After this proposal, only a fool would pay taxes now to transfer to a "tax free" Roth IRA that the feds may decide to tax someday." – WSJ editorial April 12, 2013 re the portion of BO's 2,500 page 2014 fiscal year budget that places a variable lifetime cap on the total asset value in IRAs & 401(k)s that could lead to confiscation of these retirement accounts

 

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With the realization of the veracity of the above editorial statement many high paid pundits say they are going to write columns about the federal government planning to raid retirement savings accounts – as if this idea is something new.

 

Long time readers of RTE will remember the first posting after the 2008 presidential election when I wrote – "So many left wing Democrats have their own agendas & could pull Obama in many different directions. House Speaker Nancy Pelosi, George Miller, & Jim McDermott have copied the idea of economic basket case Argentina & floated the idea of nationalizing private pension money by seizing or otherwise confiscating 401(k)s."

 

You can also check my FairTax workshop training sessions – see Q & A write-up in April 2010 posted on RTE re Roth IRAs.  In summary by 2010 it had become more & more obvious to anyone who thought about it that the government had only offered Roth IRAs & Roth 401(k)s because the government needed immediate revenue not some stream of revenue derived from required minimum distributions decades later from a citizenry pleasantly retired without a care in the world.  The promise was that the after tax corpus in the accounts would grow tax free & distributions would never be taxed again.  That promise will not be kept - consider a future politician trying to defend continuation of tax free treatment for money that has never been taxed in the economic environment we are facing if we continue to sleep-walk through the financial problems the nation faces.  Pity the poor person (pun intended) who has opened large Roth IRAs & Roth 401(k)s.

 

So it took several years for BO to reveal the evil he has planned for Americans' retirement savings plans but as indicated above readers of RTE were made aware of the dangers even before BO became president.  There is virtually no chance BO's budget plan will go into effect in the next two years – but watch out after the 2014 elections if the Democrats win back control of the House & maintain control of the Senate.  Both are real possibilities & BO is focusing on making sure they happen.

 

BO masquerades as a deficit fighter by proposing in his budget the replacement of the conventional consumer price index (CPI) with the supposedly more accurate & smaller chain-weighted consumer price index (Chain CPI) to hold down cost of living adjustments (cola) meaning the rate of growth of Social Security benefits.  BO exempts those over 76 & also those on low incomes so the result of this charade is to make the middle class poorer & more dependent on government.   But BO also uses the Chain CPI for inflation indexing the income tax brackets meaning that he is reintroducing the hated term bracket creep to the tax system for the first time in over a quarter of a century.  This subtle change in inflation indexing will move people's incomes into higher tax brackets faster than if the CPI was still used.  BO just never gets enough revenue or people dependent on government.

 

Just when (i.e., January 2, 2013) everyone thought the estate tax laws were finally settled after years of uncertainty BO's budget calls for increasing the estate tax rate, lowering the exemption, & does not index it for inflation to boot.  Steve Forbes will have to renew his call of "no taxation without respiration" & without indexation more & more families will be joining him.

 

But the most dangerous feature of BO's budget proposal is limiting the values of IRAs & 401(k)s to an amount BO feels is needed for a reasonable retirement.  The insidious part of this proposal is that the limitation (known as a lifetime cap – total balance of all of a person's retirement accounts) is not an exact dollar amount but rather is based on the amount needed to produce an annuity payment of $205,000 a year (not indexed for inflation & before tax) for a 62 year old worker in a defined benefit pension plan.  The cap, if in effect in 2013, would be about $3.4 million.  No additions to retirement accounts are permitted above the cap although additions are permitted if the value of the accounts fall below the cap or the cap is raised which is virtually impossible with interest rates @ record lows. 

 

Now the price of annuities is a function of interest rates & when interest rates finally rise to a normal non-manipulated level the cap will fall.  For instance EBRI reports that in 2006 a similar annuity paying $205,000 per year cost $2.2 million – not $3.4 million as it would today.  The obvious unanswered question is what would BO do with the $1.2 million that exceeds today's cap in this example.

 

This could very well be the introduction of a wealth tax which of course is unconstitutional – such a tax would not be uniform, it would not be in proportion to congressional representation (i.e., it is a direct tax but not apportioned by population), & it is not an income tax.  But we are protected from such wealth taxes by the U.S. Constitution.  Too bad for us that the Constitution is ignored by the citizenry & our elected representatives (SC Representative James Clyburn even famously said "there's nothing in the Constitution that says the federal government has got anything to do with most of the stuff that we do") every day of the year except for ceremonial occasions like swearing in a new president on January 20 every four years.  And it certainly would not take much effort, reasoning, or imagination for the Supreme Court (Roberts) to follow the unconstitutional precedent set in the ObamaCare case to find a wealth tax constitutional. 

 

So with no protections as described above it would be just a matter of time before the cap was lowered to include virtually every retirement account in America.  Couple this with the enactment of a 20% VAT & BO will have everyone exactly where he wants them – penniless & dependent on government.

 

Now it is bad enough for us to put up with this sort of thing if we didn't know better - but we do.  The FairTax is the remedy for reversing all of the government manipulation of the earnings of everyone's hard work that increasingly is being redistributed for the purpose of keeping those elected in office.  If this is important to you please make sure that you are doing everything you can to educate the citizenry & spread the FairTax word so that when the right candidates come along who support the FairTax we will have made their job that much easier.