How Important Is It Politically To Keep 401(k) Breaks Unchanged?

Oct 26, 2017
Originally published on October 26, 2017 12:05 pm
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STEVE INSKEEP, HOST:

Republicans in Congress have one more chance this year for big legislation. They're rolling the dice on tax reform, or at least a big tax cut. Tax reform, you know, is a little like repealing Obamacare. In principle, nearly all national Republicans favor doing that. But in reality, they disagree on exactly what to do instead.

The problem here is not cutting taxes. If you're a Republican, you can favor that. The problem is eliminating which deductions so the federal deficit does not increase. That's a tough question. One notion on the table, maybe, is limiting contributions to tax-sheltered 401(k) retirement plans. President Trump says no.

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PRESIDENT DONALD TRUMP: 401(k)s, to me, are very important. And they're important because that's one of the great benefits to the middle class. I didn't want that to go too far. That's why I ended it very quickly.

INSKEEP: But then the president said 401(k)s could be a point of negotiation. Stephen Moore is on the line. He's a fellow with The Heritage Foundation and a former adviser to the Trump presidential campaign.

Mr. Moore, welcome back to the program.

STEPHEN MOORE: Hi, Steve. Great to be with you.

INSKEEP: What's the basic problem that Republicans are wrestling with here?

MOORE: First of all, let me say, when you said that this is like, you know, for Republicans, Obamacare repeal, boy, I sure hope it isn't because for Republicans, that didn't work out in the end like that.

INSKEEP: (Laughter) That didn't work out very well.

MOORE: Right, so this - but that - but by the way, the fact that Republicans failed on the Obamacare repeal really doubles and triples the political stakes for Republicans to get this done. And I truly think that they just about have to have this happen, or else they're going to look very incompetent to voters. It's a...

INSKEEP: But it is a similar situation - right, Stephen? - because they need almost every Republican vote. They could only lose a few of them in the Senate. They want to do this without Democratic support.

MOORE: That's right.

INSKEEP: And when you get down to the details, they don't agree on them.

MOORE: Well, you're exactly right. I mean, how do you get the 50 votes in the Senate? And that's the same issue they faced in - with Obamacare where they came up with one vote short with 49. So they - it looks pretty good right now. The - every Republican voted for the budget resolution last year, which is what sort of was the enabling legislation to get the tax cut going.

And what's happening right now is, the sausage-making is going on in Congress where they're trying to figure out - a mad scramble to figure out, what are they going to put in this tax bill? What're they going to take out? That issue of the 401(k)s that you mentioned has become a hot-button issue over the last couple of days because as Republicans try to cut the tax rates, they're trying to find, you know, offsets of ways of raising the revenues to pay for the lower rates.

And one of the ideas that was floated was to restrict the amount of money put - people could put into these 401(k) accounts. There's something like 50 million people, Steve, that have 401(k)s. And even though, you know, I could make an economic argument for why it might make sense to, you know, lower the rates in exchange for getting rid of the 401(k) deductions, it has not gone over well politically. And I don't think it's going to happen because there's been, you know, outrage by a lot of voters who say, look, I like my 401(k)s. You know, 50 million have them. They must be popular.

INSKEEP: Although this is the dilemma for Republicans, isn't it?

MOORE: Yeah, it sure is.

INSKEEP: ...Because Republicans want to cut taxes. They also - many of them - profess to be concerned about the deficit, and actually, the technicalities of lawmaking here require them not to expand the deficit so much.

MOORE: That's right.

INSKEEP: Have Republicans lost interest, really, in cutting the deficit?

MOORE: Well, I mean, the fact is, they are constrained under that budget that passed last week to the - they can lose up to $1.5 trillion revenue over the next 10 years. Now, that's out of $45 trillion of expected revenue. So that means, when they want to cut something for - let's say, they want to cut the - or double the standard deduction, which is really one of the base proposals. That's an expensive thing to do because that means every taxpayer gets a reduction.

That means you're going to have to take away some things from people. And one of the problems they face is that Donald Trump has made very clear - I worked with him on this during the campaign. He said, I want this to be a big tax cut for the middle class. So if you start taking away things from the middle class, you know, that causes a lot of political problems. And it's funny.

You know, Steve, I'm old enough to remember in 1986 when Ronald Reagan did the last big tax reform - I mean, reform. And that was bipartisan. This whole issue of 401(k)s and IRA deductions came up then, as well, and that didn't go over well, and they dropped that proposal. Sometimes these ideas come back. There's also, as you know, a big fight over whether to eliminate the state and local tax deduction. And people in these blue states like New York, and California and New Jersey aren't too happy about that.

INSKEEP: Yeah, you'd lose a lot of money if you're a taxpayer in New York. So let me get you to answer the basic, broad critique of this tax plan, granting that the details are still coming out. The basic critique from the left, anyway, is that it's a bait and switch, that President Trump talks of supporting the forgotten man, the forgotten American.

But then he supports tax cuts for businesses, eliminating an estate tax that only hits the super wealthy. Those are not forgotten people. But according to independent analyses, they're the people who would get the benefits.

MOORE: So let's talk about the heart and soul of the plan, which, really, is the reduction in the business tax rate. It - to me, as an economist, and I think most - certainly, conservative economists would agree that the most important thing we need to fix in our tax system is that we have the highest statutory tax rate in the world on our businesses, and that just hurts...

INSKEEP: Oh, I got to stop you and remind you that many businesses don't pay that rate. It's not necessarily the highest in the world.

MOORE: No, of course, of course.

INSKEEP: But go on, go on, go on.

MOORE: No, that's absolutely true. So the statutory rate is very high, but for some companies, they pay much lower than that. By the way, I think that's a defect of the system, Steve. We want to set the rate from 35 percent instead of now, at 20. But we want to make sure every company pays 20, right? So we want to make sure that that rate - you get rid of all the special-interest loopholes and so on.

And I believe, if you do that, that the people who will benefit will not just be the shareholders of the companies but also will be the workers who - think about, if this works, and I think it will, you get a lot of companies moving back to the United States, jobs moving back in the United States to places like Michigan, and Ohio and Pennsylvania. And that means more jobs and higher wages. So we believe that the average worker will benefit to the tune of about three or $4 thousand a year and a higher paycheck from the additional jobs.

INSKEEP: And that's got to be the bottom line of the discussion for now, but there's going to be a lot more to say about it. Stephen Moore, always a pleasure talking with you. Thank you very much.

MOORE: Thank you, Steve.

INSKEEP: He's with The Heritage Foundation. Transcript provided by NPR, Copyright NPR.