The
Roth blunder barrels on
By
Gerald E. Scorse, Progressive Charlestown guest columnist“The Roth IRA, created by Congress in 1997, resulted from “a conscious, contemptible manipulation of the budget rules.”—John Buckley, former chief of staff for the Joint Committee on Taxation and former chief tax counsel, Committee on Ways and Means
What
was true then is truer now. Roths have become a bi-partisan affliction: they
came in under President Bill Clinton, but Presidents George W. Bush and Barack
Obama have added their own wrinkles.
Thanks to all three, nobody has to go to
the Cayman Islands to find a tax shelter; all they have to do is get their
money into a Roth. Legislators continually dream up more ways to make it
happen. Even the Internal Revenue Service has become an enabler, issuing a
ruling that creates one more route to a federally-sanctioned tax haven.
What doesn't
show up (but what starts piling up from the beginning) are the deficits that
Roths create. Fudging the numbers with upfront revenue can make budgets look
good, but it's all smoke and mirrors.
The taxes on contributions are the only
revenue that Roths will ever raise. Unlike other retirement accounts, Roths pay
no taxes on capital gains; unlike other accounts, they will never pay back
Uncle Sam for their tax-free growth.
Len
Burman is the director of the non-partisan Tax Policy Center in the Capitol.
He's called Roth accounts a numbers game, “bringing in more now, but giving up
much more in the future” via foregone revenues. As he sees it, "'Passing
on more financial problems to our kids is really irresponsible. We’re leaving
them a weak budget situation to begin with. Cutting off a major source of
revenue [taxes on retirement account capital gains] makes no sense.'”
None
at all, and the accounts are inherently unfair as well.
Compare
Roths to regular IRAs, 401(k)s, 403(b)s, and all other retirement accounts. All
except Roths ultimately pay tax both on contributions and capital gains. Roths
pay no taxes on gains. All accounts except Roths require minimum distributions
from age 70 1/2 onward. It's possible for Roths to be passed on, undistributed
and tax-free, into the 22nd century.
In
addition, the income limit that formerly kept the rich from having Roth
accounts at all was removed by President George W. Bush (though the removal
didn't take effect until after he left office). Obama has made Roth moves as
well. As part of the "fiscal cliff" deal in 2012, he opened the door
to earlier conversions from regular 401(k)s to Roths. His new myRA accounts,
set to debut by year's end, are also Roths.
Taken
together, all these steps are costing the Treasury untold amounts every year in
lost revenue. The numbers can only grow larger, and add immeasurably to the
federal deficit, as the years go by. Here, from an earlier piece, are three
simple ways to rein in Roth losses:
Abolish
conversions.
The largest Treasury losses will come from the largest Roth accounts, i.e.,
conversions. Congress should call a halt to Roth conversions. At a minimum, it
should restore the $100,000 gross income ceiling that kept Roth conversions out
of the hands of the rich.
End Roth
startups.
Other retirement plans are genuine two-way bargains: savers enjoy tax
advantages, but repay the country via taxable distributions. Roths eat away at
America’s fiscal future, taking ever-bigger bites as more accounts come
on-stream. The second reform, just as important as the first, is to stop
opening new Roth IRAs.
Require
distributions.
Minimum distribution requirements—standard on all other retirement plans—have
never applied to Roths. Accounts created under the "fiscal cliff"
agreement were set to require distributions, and Congress should extend the
rule to all Roths. Tax-free payouts could pump extra money into the economy,
and give governments at all levels a chance to recoup at least some of their
lost revenues.
Roth
accounts were a deception from the start, and everybody knew it. It's time for
the Elephants and the Donkeys to do the right thing: to dial back on the Roth
blunder.
Gerald E. Scorse
helped pass the bill requiring basis reporting of capital gains. He writes
articles on taxes.
Copyright
2014 Gerald E. Scorse