401(k), 403(b) and 457 Plans

Tax Cuts Are Coming. So Are the Fights About Paying for Them.

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Lowering the cap on 401(k) contributions

The most recent idea to get caught in the game of legislative whack-a-mole was a proposal to dramatically lower the cap on the amount that workers can set aside in their 401(k) retirement accounts. Currently workers under 50 can set aside up to $18,000 a year without having to pay taxes up front on that money. House Republicans were discussing lowering that to $2,400.

This creates both practical and political problems. Lowering the cap on 401(k) contributions would save only a sliver of the $1.5 trillion in lost revenue from the tax cuts that Republicans are pushing. What is more, such plans are widely used by middle-class taxpayers that Republicans say they are trying to help. The idea died a quick death on Monday when President Trump said he would not let it happen.

Raising income taxes on the rich

The tax framework released by the “Big Six” Republican tax working group last month — the six lead negotiators from the House, Senate and Trump administration — called for three tax brackets with a top rate of 35 percent, down from 39.6 percent today. The plan kept open the option of creating an additional tax bracket for top earners to ensure the tax code remained progressive. No guidance was given on what that tax rate would be or what income level it would apply to.

Lawmakers, now facing criticism that their plan is a giveaway to the rich, are considering adding that additional bracket, potentially keeping it at the current 39.6 percent rate or slightly lowering or raising it.

While Mr. Trump says that many of his wealthy friends have encouraged him to raise their taxes to help the middle class, doing so would be a break with Republican orthodoxy. Republican leaders in Congress have been hesitant to raise tax rates on anyone because the party’s brand is largely built around the idea that the economy does best when people have more money to spend.

Cutting corporate taxes — gradually

A big reduction in the corporate tax rate is the centerpiece of a plan that Republicans argue will trigger robust economic growth, create incentives for businesses to stay in the United States and prompt businesses to pay more to their workers. But cutting the corporate rate to 20 percent from 35 percent, while getting rid of the corporate alternative minimum tax, would cost nearly $2 trillion over 10 years. So Republicans have been talking about the possibility of a temporary tax cut or getting to the lower rate gradually, over a period of years.

Temporary or gradual tax cuts would be less costly, but they could also pack less punch for accelerating economic growth. Companies say that they are less likely to make long-term investment plans if they think their tax rates will eventually start climbing again. A phased-in tax cut would likely encourage businesses to time their investments accordingly, meaning that growth would remain sluggish in the near-term. Since Republicans are counting on rapid economic growth to pay for their tax cuts, anything that inhibits this could be counterproductive.

Grappling with a global minimum tax

Multinational corporations have been salivating at the prospect of a switch from a “worldwide” tax system to a territorial system, where profits earned abroad are not taxed by the United States. Such a switch, they contend, would make American companies more competitive with their counterparts around the world and spur hiring at home.

The fear — and the coming fight — is over a proposed “global minimum tax” that would be paired with the new system. In theory, this would protect the tax base from being eroded by companies having even more incentive to do business overseas. However, firms fear that such a tax would continue to make them less competitive than their global counterparts and mean that the tax system is not truly territorial.

Curbing the deductibility of corporate interest

For months, House Republicans pitched a plan to eliminate the deductibility of corporate interest in exchange for allowing companies to immediately write-off equipment expenses. The latest plan would allow companies to immediately expense their equipment purchases for five years and only partially deduct interest they pay on loans.

However, compromises come with their own sets of problems. Making expensing temporary could lead to an investment hangover after five years. Firms that rely heavily on debt are bracing for a big fight if the curbs on deductibility prove overly onerous. Ultimately they may get their way, as Mr. Trump’s industry – real estate – prizes the deduction.

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Wendy Pettit

Wendy Pettit is a writer for NYT and writes for other publications on her spare time. She lives in Chicago with her husband and her dog Zuko.

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