Let’s geek out for a minute on tax deductions before people start freaking about about their retirements.
There was a brief moment of panic for any taxpayers who were watching the White House Press briefing Thursday when press secretary Sean Spicer said the President’s tax reform plan would scrap preferred tax treatment for 401ks.
“The current plan right now both protects charitable giving and mortgage interest and that’s it,” said Spicer, when asked specifically about tax treatment of 401ks.
That would mean Americans would have to fund their retirements entirely with after-tax dollars and the government would be rolling back a $71 billion incentive.
It was only a temporary fire alarm, however. The White House quickly clarified that Spicer was referring only to deductions, not exclusions from taxable income. They don’t have any intention to take away tax preference for such retirement accounts.
But you could forgive Spicer’s confusion; this is confusing stuff, which is a big part of the reason everyone talks about wanting to simplify the tax code.
And the President’s current plan — it’s really more of the one-page skeleton of a plan — didn’t specifically say 401ks would be protected.
In announcing the guiding principles for tax reform on Wednesday, Treasury Secretary Steven Mnuchin said there would be only two tax deductions that would be sacrosanct in negotiations with Capitol Hill.
Here’s that exchange from Wednesday’s briefing in its entirety:
REPORTER: When you talk about the individual tax rates you’re also talking about eliminating some of the taxbreaks. Are you talking about eliminating tax deductions? And which ones are you talking about eliminating, and which ones are you talking about keeping?
SECRETARY MNUCHIN: Correct, we are going to eliminate on the personal side all tax deductions other than mortgage interest and charitable deductions. We think that will be sweeping reform.
Sweeping indeed. The money you deduct from your tax bill for the enormous mortgage you have is safe. And so is the money you might deduct for giving to your church or the food bank. But all the other deductions? They’re on the table.
And you don’t necessarily have to itemize deductions from your taxes for this to affect you.
The single largest and most expensive tax deduction is that the government does not count employer-provided health insurance as income for tax purposes. That’ll cost the government almost $236 billion in 2018. Getting rid of that exemption would cost everyday Americans a whole lot on their tax bill each year.
The US government spends more money on tax credits, be they for businesses or individuals, than it spends on the Pentagon. It spends more on tax deductions — “expenditures” as they’re known in the biz — than it spends on Social Security. More than it spends on Medicare.
Here’s a chart from the Center on Budget and Policy Priorities:
They hand out tax credits for all sorts of things: to reward companies for investing in alternative energy investment or for people who have children.
Getting rid of all but two tax deductions for personal tax deductions is one of the more remarkable and revolutionary things President Donald Trump is proposing. And that’s really what people mean when they talk about simplifying the tax code.
There are hundreds of such goodies, large and small, written into the tax code. Mortgage deductions, charitable giving and now 401k contributions are just three of the top 13. Here’s the full list from the Tax Policy Center:
The point here, clearly, is that tax reform will be just as complicated as health care reform. Simplifying the tax code will be radical change. It might be needed and it might be the right thing to do, but it’s going to change the way people go about their lives.
Would companies have to pay people higher wages if they had to pay taxes on their employer-provided health insurance? It’s through companies, by the way, that most Americans get their health insurance.
Would people be as interested in buying houses if they couldn’t deduct the insurance they pay on their mortgages?
Do big things and shake things up! That’s been Trump’s policy mantra as he’s sought to upend conventional wisdom and blow up US policy on immigration, health care and the tax system.
His top economic adviser, Gary Cohn, called the Trump presidency and Republican control of Congress a once-in-a-lifetime opportunity.
“This isn’t going to be easy,” Cohn said, in an epic understatement. “Doing big things never is. We will be attacked from the left and we will be attacked from the right. But one thing is certain: I would never, ever bet against this President. He will get this done for the American people.”