Retirement plan taxation is unfair to the middle class

From the WSJ.

"The “Notable & Quotable” of Feb. 23, which is from the Tax Foundation’s report “Sources of Personal Income,” correctly points out that middle-class Americans earn substantial capital gain returns from pensions and other retirement accounts. The article doesn’t mention how unfair this is to the middle class. The entire distribution from a retirement plan, including the portion that represents long-term capital gains, is taxed at regular rates which can be as high as 39.6%. This is almost double the 23.8% maximum tax rate on long-term capital gains earned outside of a retirement plan. Investors pay less tax than retired workers on the same long-term capital gains. Additionally, contributions of wages to an IRA or deferred compensation plan, such as a 401(k), are deductible from income taxes, but workers still have to pay Social Security and Medicare taxes on the amount contributed. Investment income is never subject to Social Security tax, and only a reduced rate of Medicare tax applies to very high income investors. These are examples of how the tax code favors the wealthy and investment class at the expense of middle-class workers.  

Em. Prof. Andre Montero

Kingsborough

Community College

Brooklyn, N.Y."

Here was a response plus one comment:

"In his March 3 letter, Andre Montero states that “the tax code favors the wealthy and investment class at the expense of middle-class workers.” He cites as an example that the “entire distribution from a retirement plan . . . is taxed at regular rates that can be as high as 39.6%.” To be in the 39.6% tax bracket, joint filers must generate at least $464,850 in 2015 income. At a typical 5% IRA withdrawal rate, someone would have to have an account worth $9,297,000 to generate that much income, hardly a “middle class” sum. A more likely example, in my experience, would be someone who has, say, $500,000 in an IRA. Using the same withdrawal rate of 5%, that would generate $25,000 a year, which would typically keep the individual in the 15% bracket.

The top 1% of individuals earn 16% of the nation’s income and yet pay 37% of the taxes. The bottom 50% of taxpayers earn 12% of the nation’s income yet pay 3% of the taxes, less than 1/12 as much. Yet academics keep calling for more.

No wonder Arthur Godfrey said, “I’m proud to be an American and pay taxes, but I could be just as proud for half the money.”

Scott Kaufmann
Kansas City, Kan.

Alan Reynolds  

 

Mr. Kaufmann says, "Someone who has, say, $500,000 in an IRA. Using the same withdrawal rate of 5%, that would generate $25,000 a year, which would typically keep the individual in the 15% bracket."  But that is true only if that family had no income from Social Security, pensions, work, etc.  It is quite doubtful that most households with $500,000 in various deferred savings plans (e.g., I have IRA, 401k, 403b and Keogh savings) has no taxable investments, no defined benefits pension, and is also ineligible for Social Security.

With other income considered, withdrawal from $500,000 in retirement accounts would commonly be subject to marginal tax rates of 28% or more, plus state taxes in most cases. Besides, prudent two-earner couples should be willing and able to accumulate considerably more than $500,000 by age 70.5."