Trump Will Protect Your 401(K)... Or Maybe Not

10/25/2017 09:19 pm ET Updated Oct 26, 2017
Drew Angerer via Getty Images

Republicans are playing a game of peek-a-boo on their tax plan. They don’t want to release the full details, because they know full well this will leave them open to attack from both the left (“Not one penny more for the One Percent!”) and from the right (“Why are we blowing up the deficit, now that we’re in charge?”). But the congressional Republicans who are in charge of drafting the tax bills do still need to gauge support for various proposals, so they are currently engaged in selective leaking in order to run these ideas up the old political flagpole, to see if they are salutable or not (so to speak) among their members. The latest of these is to sharply reduce the amount of tax-free income that can be socked away in a 401(k) retirement plan. President Donald Trump initially pushed back hard against this idea, but today indicated that he might just be open to negotiation on the issue. Which begs a much larger question: Will Trump actually go to the mat fighting for any particular tax issue? Or will Republicans just flat-out ignore the White House, knowing full well Trump is so desperate to sign a major piece of legislation that he’ll agree to pretty much anything they come up with?

Republicans have a problem with their tax-cutting plan. The problem is it is so heavily weighted to deliver a bonanza of benefits to both businesses and the top income brackets that it would ― if confined just to tax cuts ― blow an enormous multi-trillion-dollar hole in the budget for the next decade. They are currently in the process of laying down a marker to restrict this deficit spending to only blow a $1.5 trillion hole in the budget. Any tax-cutting bill will have to keep within this constraint in order to be passed in the Senate with only 51 votes. Which means Republicans are looking around for what they call “pay-fors” ― tweaks to the tax code to raise some of the revenue lost by sending something like 80 percent of the tax cuts to businesses and the wealthy.

What this means in practical terms is soaking the middle class and upper-middle class in order to do things like abolishing the estate tax and the alternative minimum tax (both of which hit the One Percent almost exclusively). Their first idea was to get rid of the deduction for state and local income taxes. This is already getting some pushback, because (surprise, surprise!) there are actually a lot of Republican House districts where the constituents like the state income tax deduction. It’s not as partisan an issue as the bill’s drafters initially thought, in other words.

So they turned to the deduction for 401(k)s instead. This, again, would largely impact the middle class, and the upper-middle class, who are the ones who utilize this exemption the most. Over the past half-century, American businesses have successfully moved away (except in the few sectors still unionized) from “defined benefit” retirement plans to the “defined contribution” individual retirement plans (IRAs and 401(k)s, for the most part).

These plans are very popular, it bears mentioning. Republicans mess with this issue at their peril, in other words. Trump seemed to grasp this when, earlier this week, he tweeted out: “There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!”

Now, in normal times, with a normal president, that might have shut the issue down cold. Republicans in Congress would have seen this as a bright red line being issued from the Oval Office, and would have immediately backed off the concept. These, however, are anything but normal times.

Which is where the question of Trump’s effectiveness truly comes into play. This, after all, is the first big bill where Trump has shown any real interest in the details. He didn’t care what was in any of the “repeal and replace Obamacare” bills, and he never engaged in any negotiations with the people in Congress writing such bills. This time, though, the White House is involving itself in the haggling. But, as Trump’s foray into the 401(k) issue shows, congressional Republicans might not be paying much attention, since they know that Trump can always change his mind (he does so on a regular basis) and, again, that the chances are good that he’ll sign anything they put in front of him. So why bother negotiating?

The Washington Post helpfully laid out the timeline:

Just a few hours ago, President Trump told reporters at the White House that the popular 401(k) tax break just might be up for negotiation as part of tax reform, after all.

What a difference 48 hours makes.

On Monday, Trump tweeted that there would be “NO change to your 401(k),” as a result of the tax reform proposals now working their way through Congress. How seriously did congressional Republican leaders take this? Not too seriously! On Wednesday morning, House Ways and Committee Chair Kevin Brady (R-Texas) told a Christian Science Monitor breakfast this might not be so. “We are continuing discussions with the president, all focused on saving more and saving sooner,” he said.

Now Trump has agreed. When asked Wednesday afternoon if the 401(k) was up for grabs, he responded, “Maybe it is and maybe we’ll use it as negotiating.”

Is your head spinning? It should be.

Republicans already know that any tax plan they come up with is going to be attacked. They even know precisely what their opponents are going to say about it ― that it screws the poor and middle class at the expense of generous tax breaks to the ultra-wealthy. They are reportedly trying to somewhat blunt these accusations by concentrating their tax cuts more on the middle class, but that may all just prove to be spin in the end (we’ll see, when the final plan is publicly released and analyzed, in other words).

If they truly did want to achieve what they say they do (slashing tax rates on businesses, and cutting taxes for the middle class and not the wealthy), there are some very easy ways to achieve this goal. My guess is that none of them will ever be proposed by the GOP tax-cutting committees on Capitol Hill.

The biggest transfer of wealth in the current GOP plans is to shower benefits on corporations, while making everyone else pay for it. This is obvious on the face of it, because in all the tax debating going on, I have yet to hear a single Republican offer a single business loophole that they will be closing. “We’re lowering rates by closing loopholes” is their talking point, but when you look closely, they are mostly lowering corporate rates by closing what they call “loopholes” on individual income taxes. That is seriously unbalanced. Trump even campaigned heavily on closing one particular business loophole ― the “carried interest” loophole used by hedge fund managers. So far, Republicans in Congress haven’t even mentioned the issue, making it likely this loophole will remain. This allows financial services bigwigs to pay roughly half the tax any other worker in American would pay on their income. Trump promised he’d close this egregious loophole, but Republicans don’t seem inclined to do so. And if they don’t even have the stomach for reining this abusive practice in, it’s a pretty good bet that all the other huge business loopholes will emerge unscathed as well.

But the most obvious example of the difference between reality and Republican spin on taxes is that there is indeed a mechanism for limiting wealthy tax filers’ deductions. If Republicans were honestly trying to target all the benefits of their tax-cutting on individuals to the middle class (or even the upper-middle class), then all they would have to do is to phase out all deductions above a certain amount of income. This would, in effect, create a “maximum allowable deduction level” which, after it was reached, would limit any other tax writeoffs above that amount.

This, as I said, already exists within the tax code. It is called the alternative minimum tax, and one of the big agenda items Republicans have announced is not to beef this mechanism up (to insure that all the tax-cutting benefits go to the non-wealthy), but to totally eliminate the tax. As I’ve been pointing out for a while now, this one change to the tax code would shrink Donald Trump’s taxes by an astounding 81 percent.

So don’t believe the spin. Republicans are considering limiting what average families can contribute to their 401(k)s precisely so they can give people in Trump’s income bracket an enormous tax cut each and every year. You won’t be able to save as much for retirement tax-free, because we have to slash Trump’s taxes to the tune of four out of every five dollars he is supposed to currently pay. That is something Democrats need to keep in mind, in the upcoming debates.

Chris Weigant blogs at: ChrisWeigant.com

Follow Chris on Twitter: @ChrisWeigant

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