What the US Congress has done here with legislating in the retirement plan arena is a clear case of "Tax Deferrals Gone Wild."
And the overwhelming beneficiaries of these gargantuan amounts of tax deferred earnings buildups in all Defined Contribution Plans and in Defined Benefit Plans are the wealthy.
Given the $16 trillion US Debt load, coupled with huge annual continuing deficits here on out, we need some way to fairly rein in the incredibly negative impact on the US Debt of these massive "Tax Deferrals Gone Wild".
In four earlier posts on US Fiscal Cliff Fair Trade-off recommendations, all related at least in part to retirement plans, I made significant down payments in reducing the US Debt Load, which was caused in no small part by these clearly abusive "Tax Deferrals Gone Wild."
In my #2, I recommended disallowing Salary Deferrals of highly-paid employees.
In my #3, I recommended reducing the maximum annual amount of contribution per employee to Defined Contribution Plans.
In my #12, I recommended accelerating the required minimum distribution date of all high dollar accumulation retirement plans.
And in my #13, I recommended assessing and collecting Medicare Taxes on all Retirement Plan Distributions, in cases where the amount of the total asset accumulations in all retirement plans of a participant is very high. This one also recommends assessing Medicare Taxes on the portion of all Defined Contribution and Defined Benefit Pension Plan Contributions made by companies that are related to highly-compensated employees.
Now the money raised over the next ten years by the US Government for these above four recommendations would be huge, but we need to take it to a completely different level, if we want to really seal the deal on eliminating a large portion of the economic injustices caused by these "Tax Deferrals Gone Wild", which dramatically benefit the very wealthy over every one else, and at the same time, cause a severe financial drain on the US Government.
Thus in my current recommendation, I am dealing on the front end, in the tax year when the company making the retirement plan contribution gets the huge tax write off.
My proposal here is to give a maximum US Federal income tax rate benefit of 25% for all company tax deductions for all retirement plans, both all Defined Contribution and all Defined Benefit Pension Plans.
Thus, if you have a C Corp getting a pension tax deduction in 2013 or any subsequent year, and assuming the applicable Corporate US Federal Income Tax Rate is 35%, the C Corp gets a much lower 25% tax rate benefit on its pension tax deduction, instead of a 35% tax benefit.
And a C Corp getting a Defined Contribution Plan tax deduction in 2013 or any subsequent year, and paying a 35% Corporate Income Tax Rate, will get a maximum tax rate benefit of a much lower 25% on its contribution.
And for all pass through entities, like SubS, Partnerships and LLCs, which are passing through income to the individual level, and where the high tax rate individual is paying a US Federal Income Tax rate of 39.6% in 2013 or in any subsequent year, the tax benefit income tax rate of these retirement plan deductions will be at a much lower 25%.
The money raised here by the US Government related to this proposal will be very substantial, and it should all be used to reduce the US Debt.
And if you wanted to fairly target this proposal much more at the portion of the Defined Contribution Plan and the Defined Benefit Plan related to the highly compensated employee, then one way to do this would be to have say a 22% maximum US Federal income tax rate benefit for Retirement Plan Contribution tax deductions of the company that are either allocated to or related to employees that have Total Compensation of $200,000 or more in the year the contribution is made. And there would be a 28% maximum US Federal income tax rate benefit for all employees having Total Wages below $200,000 in the year the contribution is made.
